The Initial Public Offer (IPO) market has emerged as a potent market in the last couple of years. In fact, in the financial year 2016-17, Indian companies raised nearly $2 billion through the IPO route. In the current financial year, Indian companies have already raised $5 billion through the IPO route and are likely to add another $2 billion in the remaining months, making it one of the best IPO years in recent history. An IPO has a long-drawn process that eventually leads to the final IPO offering on the market. Here is a detailed look at the process that goes on behind the actual IPO.
Process behind the Initial Public Offering (IPO).
First the company in question needs to be convinced that it needs to come out with an IPO. An IPO could be structured for 2 reasons. Firstly, the company may be looking for fresh funds to finance its expansion and diversification plan. This will increase the share capital of the company. Secondly, the company could also structure it in the form of an Offer for Sale (OFS). Here there is no addition to shares but the existing shareholders offload part of their holdings in the unlisted company through the market and get it listed in the process. Quite often it is a combination of a fresh issue and an OFS.
The next step is the appointment of the investment managers. They are popularly referred to as Book Running Lead Managers (BRLM) since typically of the public issues today happen through the book building route only. The investment banker not only advises you on the timing and the methodology of the issue but also helps you get the best price in the market. These BRLMs combine legal expertise with domain kills with market insights.
The next step is to get the approval of the Securities & Exchange Board of India (SEBI) which is the nodal regulator for the capital markets in India. The regulator looks at the IPO from the point of the view of the interests of the investors at large and will raise objections over any part of the plan that is not in tune with the interests of the investor and the integrity of the markets.
Once the SEBI approval is received, the next step is to file the Red Herring Prospectus (RHP). The RHP is like an annual report of the company and includes its income statements, its balance sheet, its business plan, objectives of the issue, methodology of utilization of funds etc. This is the document that is your best reference point for investing in the IPO and investors are required to go through the same in detail.
Once the RHP is filed the next step is to start marketing the issue. There is a good bit of marketing that goes on for any IPO. Firstly, there is extensive marketing that is done through mass media like the TV, print media and the internet. Secondly, the promoters of the company along with the BRLMs conduct investor meets and broker meets across India to sell the idea to retail and HNI investors. Finally, there is the major institutional thrust that is given by meeting domestic funds and large institutions like LIC. Additionally, companies looking at global investors also conduct road shows at key financial centers across the world like New York, Boston, London, Singapore and Hong Kong. Each IPO is backed by an aggressive marketing blitz.
Then there is the final price band that is set. Since Book building is all about price discovery, the band is indicated and then the final price is discovered based on the demand for the IPO. Heavily oversubscribed IPOs offer shares closer to the upper band of the IPO. Once the price band is fixed the IPO application forms are printed and distributed through brokers and distributors.
Then comes up the main step of the actual issue. Book building applications can be logged online through your online trading account or physically through your broker or your banker to the issue. Normally, the IPO is kept open for a period of 3-4 days and the updated subscription numbers are available on a continuous basis from both the stock exchanges.
Once the issue is closed and satisfactorily subscribed to, then the basis of allotment is finalized in the next 1 weeks’ time. Here allotments are made based based on allotment that is approved by the regulator and the exchanges. The delay in issuing refunds has reduced drastically since retail investments are required to come through the ASBA (Application Supported by Blocked Amount) route where the debit happens only on allotment.
Finally, there is the actual listing of the stock which converts the IPO into a secondary market play. From that day, the stock can be purchased and sold on the secondary market.
The IPO process in India has evolved substantially over the last few years. The effort is still on to compress the listing time still further. That could happen soon with the accent on digitization.