IPO Process in India – Step by Step guide for Beginners – How it Works

Let’s explore how IPO Process in India works, in this article. We assure to cover all the steps inclusive in the process of going public.

Initial Public Offering or IPO refers to a process through which privately owned companies go public.

These companies allocate a significant portion of their shares, stocks or securities with aspirant traders for the first time via IPO.

In return, a company piles up the required funds to sort out the financial problems within their business.

To simply put, these companies enter the stock market and may have a limited number of shareholders behind.

For instance – prior to IPO, family, friends and founder of the company might be the only investors for the company. Thus limited cash flow may be realized before.

After IPO, company can collect more funds from investors by sharing its ownership with them. Also, it is the safest way that prevents businesses from drastic recession.

For instance – if the company earns losses, investors may also lose their money but the company will have to share the returns with the investors if it generates profits.

These days, IPO in India continues to make a special appearance in investor’s mind. So, let us get started with the article in brief.

Overview of IPO Process in India

Here we break down the whole IPO process into points so you could come to know how this whole structure works.

1. Selecting an Investment Bank
2. Register with the SEBI
3. Pricing
4. Stabilization
5. Transition

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Selecting an Investment Bank – STEP 1 of IPO Process

The whole process begins from an investment bank selection. Issuing company first selects the ideal bank for investment on its IPO.

The merchant bank underwrites the company. Then buys its shares entirely or partly and sells them to the public.

It even helps the company in the due diligence, making the IPO process relatively easier.

Register with SEBI – Step 2 of IPO Process

In India, companies entering stock market via IPO are first required to get registered with SEBI.

The application needs to be submitted including all the essential documents to become eligible for the IPO vetting process.

The documents may include company’s annual report, DRHP and further details. Initially, Rs.50,000 listing fee is charged from the company that later vary depending upon the company’s share capital per year.

Moreover, the company will have to make it clear how it is going to utilize the funds that it raises from IPO.

If the given reasons comply with the rules and regulation set by SEBI, green signals can be expected. Else, the application may be rejected.

Pricing – Step 3 in Initial Public Offering Process

After receiving the green signal from SEBI, a date is issued to the company to start selling its shares.

Prior to that date, company including underwriters settles on the offering price (for instance- the selling price of issuing company’s shares).

Also, what numbers of shares should be issued; everything is decided by the company on its own.

Companies strive to make the offered price attractive so it could raise capital for itself. Here are some of the chief factors affecting the offering price

• Road shows success or failure
• Market Economy Condition
• The Company’s Goal

While issuing the shares, IPOs are often underpriced. It helps the company to attract more public investors.

Even though the issuing company doesn’t receive the true value of its shares, still the company bears this risk to boost the demands of its shares in the market.

Stabilization – Step 4 in IPO Process

When the issued shares enter the market, the underwriter may carry out the after-market stabilization.

This is done in the instances of order imbalances when purchased shares values below or equal to the offering price.

However, the stabilization process lasts for a short period only. Meanwhile, underwriters have full access to influence the prices of the shares issued.

Transition – Last Step in IPO Process

At last, transition to market competition brings further changes in the issued shares prices. Usually, this transition begins after the 25 days to the Initial Public Offering.

Once the 25-day period laps, the whole estimation and valuation of earning is carried out by the underwriters for the issuing company. This is how a successful issue is made.

IPO Process in India – Conclusion

So this is how the IPO process works in India and how a company issues its shares first time to the public.

The entire process usually takes total 25 days and meanwhile the underwriters or investment bank plays a critical role.

They may act as an advertising partner for influencing the investors. They may even influence the issued share prices to raise its demand in the market.

FAQs – IPO Process in India

What makes a company eligible for an IPO?

A business must have a minimum compensated capital of Rs 10 crore to be listed on the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE) while entering through IPO.

In addition, its market capitalization, even after the IPO is issued, should be Rs 25 crore.

As mentioned on NSE website, there must be a minimum three years of track record of the issuing company seeking to get listed on stock exchange.

It reflects the authenticity of the company that also helps them to draw more funds in future.

Why does a company file for an IPO?

There are a number of benefits of IPO as it helps the company in changing its status from privately owned to public company. Let’s take a quick glimpse of it.

• To collect funds from a broader pool of investors
• Gain visibility
• Aid mergers & acquisitions
• Offer an exit for early investors

What determines the price of company’s IPO?

A higher stock price would benefit from increased demand for the company Aside from the market for a company’s stock. Many other considerations affect an IPO valuation, such as industry analogous attributes, growth opportunities, and the company’s background.

Are IPOs a good investment?

Initial public offerings (IPOs) can be overrated. When an issuing company proves to be a good port of investment, it may continue to be a good investment option even after the IPOs issues.

Even after IPOs, the share prices of these companies are expected to grow especially if the company follows a strong business model.

Don’t worry if the prices drop than expectations in the initial phases. If your researches are right, it may yield better results in future.

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