Most companies start with limited resources, as they do not have the funds to invest heavily right at the beginning. However, with time and better business operations, they grow and reach a level where they must expand to increase profitability. This is a time when they raise funds from the general public through a process called the IPO.
The term IPO stands for Initial Public Offering, and it is a significant event in a company's life cycle. This article will explain the IPO cycle while elaborating on each of its stages.
By the end, you will understand the process a company goes through to raise capital from the public and the potential opportunities (and risks) involved in participating in an IPO.
What is the IPO cycle?
An IPO is essentially a company's transition from being owned by a small group of private investors to having its shares traded on a stock exchange. This allows the company to raise a significant amount of funds by offering its shares to the general public. You can then buy and sell these shares on a stock exchange, such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE).
However, there are numerous steps involved, from the day company owners think of launching an IPO to actually witnessing the shares list on the stock exchanges. An IPO cycle details the entire process of a private company’s transition to a public company by offering its shares to the general public for the first time through an IPO.
A detailed understanding of the IPO cycle
Now that we have defined the IPO cycle, let us take a look at the steps involved:
1. Pre-IPO stage
The pre-IPO stage is the first stage where a company decides to raise funds through an IPO. The stage involves analysing the company's financials, estimating its valuation, and hiring underwriters to help with the IPO issue. Analysing financials and valuations allows the company to determine an approximate amount it wants to raise from the public during an IPO. However, the company has to adhere to various IPO requirements set by the Securities and Exchange Board of India (SEBI) and present their plan to company promoters and investors.
2. IPO phase
The second stage involves companies filing a registration statement (prospectus) with the concerned regulatory authority. In the case of IPOs, SEBI is the regulatory body. The registration statement must contain company details such as its financials, operations, risks and other required disclosures. Once submitted, it goes under SEBI review to be accepted or rejected.
3. Marketing the IPO
Once SEBI approves the company’s IPO prospectus, the company and the underwriters start marketing the IPO to generate investor interest. The company may create digital or newspaper ads to market the IPO and ensure the highest possible investor demand. The process also includes communicating the IPO issue with other big investors, such as Qualified Institutional Buyers (QIBs), and collecting indications of interest.
4. Subscription phase
This stage of the IPO cycle involves finalising the offering price based on the demand generated during the marketing phase. Once the company sets an IPO price band, the investors can apply to the issue at the set price using their demat accounts or net banking. After the successful IPO allotment process, the amount is debited from the investors’ bank accounts, and the company gets the proceeds. The company can use the proceeds for various business purposes such as expansion, debt repayment, development, etc.
5. Post-IPO phase
Once the subscription period is over, the company shares list on the stock exchanges and enters the secondary market. The investors who received the shares during the IPO period can sell them, and new investors can buy the shares after the shares are listed. The share price fluctuates in real time based on the buying and selling volume.
Explaining the IPO cycle
- SEBI application: A company must file an application with SEBI to indicate its plan to launch an IPO. SEBI reviews the application and approves it once all the set guidelines are fulfilled.
- DRHP: Every company that wants to launch an IPO must file a Draft Red Herring Prospectus with SEBI. SEBI reviews the DRHP and suggests changes before giving approval.
- Marketing: The company and the underwriters market the IPO issue using various marketing channels, such as advertisements and social media.
- SEBI approval: SEBI approves the DRHP after suggesting chances and ensuring that all the required information is present in the DRHP.
- Price band: The company and the underwriters decide on the IPO price band, a range of prices for the investors to bid on the shares during the IPO.
- Share allotment: Once the IPO issue is over, the company and the underwriters allot the shares to the investors who applied to the IPO issue. The investors may or may not get the shares depending on the demand and subscription level.
- Listing: On the listing day, the company shares are listed on the stock exchanges for all investors to trade. The shares can open at a premium (higher than the issue price) or at a discount (lower than the issue price).
Conclusion
A company that wants to go public must go through every step of the IPO cycle. SEBI regulates and manages every step to ensure that companies adhere to every set guideline and that investors are protected if they apply to the IPO issue. Now that you know what is IPO cycle, you can better understand an IPO issue and ensure that your investments are protected every time you apply for an IPO.
