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What Do You Understand By IPO Cycle

29 Nov 2023

Introduction:

Going public allows companies to raise working capital for expansion and other general corporate activities. When a company’s shares are opened for sale to the general public for the first time, it is called an Initial Public Offering (IPO). As an investor, you can invest in IPOs of promising companies to acquire their shares at reasonable prices and seek long-term profits.

However, the process of launching an IPO isn’t a one-day affair. To launch an IPO, a company has to follow a dedicated IPO cycle that starts with preparing the Draft Red Herring Prospectus (DRHP) with the help of an underwriter and terminates with the stocks getting listed on the stock exchanges.

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In this article, you will learn about the IPO cycle and its different stages in detail. Let’s get started.

What is an IPO cycle?

As mentioned, the IPO cycle refers to the entire process through which a company can launch its IPO. It needs to follow various steps to raise money from the equity markets and get its shares listed on the stock exchanges. Only after the previous step is completed a company can move on to the next step of the cycle.

What are the different stages of an IPO cycle?

Below are the different steps or stages involved in an IPO cycle:

Hiring an underwriter

The first step in an IPO cycle includes hiring the services of an investment banker to work as an underwriter for the IPO. The responsibilities of an underwriter are to analyse market functioning and the issuing company’s fundamentals and financials. To begin with, an underwriter agreement is signed between the banker and the issuing company.

Preparation of the DRHP

As per the rule, a private company willing to launch its IPO is required to file a DRHP with the Securities and Exchange Board of India (SEBI). The DRHP includes all information about the IPO and the issuing company, such as its financials for the last three years, strengths, weaknesses, the estimated size of the IPO, etc. The company prepares this document with the help of the underwriter.

Getting SEBI’s approval

Once the DRHP is prepared, the company needs to send it to the SEBI for approval. After scrutinising the details mentioned in the draft papers, the market regulator decides whether or not to approve an IPO application.

Marketing

As soon as a company gets SEBI’s approval, it starts marketing its IPO. It might conduct roadshows across the country, send advertisements through various forms of media, and visit major commercial hubs. The primary motive is to attract High Net-worth Investors (HNIs) and tell them about the company’s business plans and growth prospects.

Deciding the price band

Next, the company needs to decide on the price band for its IPO. This is the range in which prospective investors can bid for the shares. After consulting with the underwriter, the price band is decided based on the issuing company’s fundamentals, growth potential, and several other factors. The final size of an IPO depends on the price band decided by the company.

Investor bidding

After deciding the price band, an IPO is opened for public bidding. During this period, different investors place bids for buying IPO shares. 

Allotment of shares

Once the bidding window closes, the issuing company starts working on the share allotment process. If an IPO is undersubscribed, all subscribers are allotted shares. But if an IPO is oversubscribed, the allotment is done through a lottery system.

Listing

This is the last and final step of the IPO cycle. It happens after the completion of the bidding process and subsequent allotment of shares. After the listing, the shares can be traded freely in the secondary markets.

To conclude

The IPO cycle involves a lengthy procedure that can take six months to several years. You must thoroughly study a company’s DRHP before investing your hard-earned money in its IPO. Instead of the market euphoria, always go by the company’s fundamentals and growth prospects.

If you need a Demat account to start your IPO investment journey, you can open it for free with Motilal Oswal.

 

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