If you have closely noticed, the number of listed companies on BSE and NSE for the previous few years has gone up drastically. The reasons can be different for each of the companies for becoming a public organization but one common thing here is IPO. They all have gone through the IPO or Initial public offer process to get their shares listed on the stock exchanges.
With the rise in startups in India, the number of IPOs is also rising every year. It is a great sign for the economy that now it is becoming capable of doing its businesses and manufacturing. So, if you want to list your company on the stock exchange and go public for raising capital, gaining brand value and popularity or other reason, then you need to go through few simple steps for IPO which are pre-determined steps of an IPO Process in India.
1. Choosing the Right Investment Bank
The first step for going public or to list the shares in the stock exchange, you need to choose the right investment bank for your company. It is the most crucial thing you need to do as the investment bank will give you all the setup and ideas for your IPO. They will do the underwriting of your shares which is the primary thing required for issuing shares in public.
You need to choose the investment bank based on –
- Experience: Check for how long they are in the business. You need to be aware of how they have handled their previous IPOs.
- Reputation: Make sure that the investment bank has a good reputation in the market. It needs to have a brand value in the market so that the investors get attracted to the IPO.
- Distribution Network: The investment bank must have a great clientele so that it can offer the IPO to more retail as well as institutional investors. This will help the issuing company to sell their shares faster and get good investors.
- Research work: The investment bank must be prudent with its research work. It needs to evaluate the market for the IPO and also other factors to make the IPO a successful one.
- Relationship between Investment Bank and Issuing Company: Finally, if you have a good connection and rapport with the investment bank it will be a plus for you only.
2. Regulatory Filling and Due diligence
This is the most important step involved in the IPO Process. There are many things you need to take care of for registering your IPO and implementing it. The primary thing here is Underwriting which is nothing but the process of selling the shares of the issuing company to the investors and it is done by the investment bank. For the underwriting of the shares of the issuing company by the investment bank, there are certain types of agreements which are signed between the two and they are –
- Best Effort Agreement: This is the basic agreement under which the investment bank does not need to guarantee any amount of sale of shares. It has only the responsibility of selling the shares up to their best effort.
- Firm Commitment: Under this type of agreement, the investment bank purchases the whole of the issue. They further resell those shares to the investors and this ensures a particular amount of capital to be raised.
- All or None Agreement: This is a hit or miss type of agreement – where even if only one share is left, the whole of the issue is canceled. So, either all the shares are sold to the investors or none of them can be sold.
- Syndicate of Underwriters: When an IPO is processed by multiple investment banks then it is known as a syndicate of underwriters’ agreement. Here, one investment bank leads the other banks and the IPO is divided among all the banks involved. This is to mitigate the risk involved in IPO with one single investment bank. If more than one bank works on an IPO, then the number of clients increases and so the prospective investors.
Documentation for IPO:
The underwriter needs to draft the following documents for processing the IPO –
- Clause for Reimbursement: There are certain out-of- the-pocket expenses involved in the IPO Process which are made by the underwriters to carry on the process in different stages. The issuing company needs to reimburse these expenses. If the issuing company withdraws the IPO, then also they are required to pay all these expenses as per this clause in the engagement letter.
- Underwriting Discount or Gross Spread: It is the difference between purchase and sale price of the issue. It means the underwriter purchases the issue from the issuing company at a price and sells it to the investors at a different price. The difference is known as the Gross spread or underwriting discount. When there are multiple underwriters – syndicate- then is it divided into a 20:60:20 ratio. The lead IB gets 20% of the gross spread, 60% of the gross spread is divided amongst the other underwriters and the remaining 20% is paid for the expenses incurred for the IPO underwriting process.
- Letter of Intent: It contains the commitment of the underwriter for making an underwriting agreement with the company issuing the shares. It also states that the company will co-operate with the underwriting company and provide them all the required information for due diligence. Finally, it also states that an agreement will be made to provide a 15% over-allotment option to the underwriter. It doesn’t state any pricing of the issue though.
- Underwriting Agreement: This is the agreement between the issuing company and the underwriter which comes into effect after the pricing of the issue is decided. Before the pricing, the letter of intent persists. Now, it is a contract and according to this, the underwriter is bound to buy the issue at a specified price from the issuing company.
- Registration Statement: It contains the Prospectus and Private filling. The information provided in this statement includes financials of the company issuing the shares, insider holdings, ticker symbol that the company will use, management’s background, any legal issues that the company had faced in past or have been facing in the present (if any. While the prospectus is for the public and the private filling is for SEBI. Once the registration statements are prepared, they are required to be submitted to SEBI for verification. Once SEBI gives a nod to the IPO, then the firm decides the pricing.
- Red Herring Document: It is like an initial prospectus before SEBI approves the IPO, this is created for marketing. The underwriter and the company organizes “Dog and Pony show” which can last for three to four weeks where they market their IPO to the prospective investors.
3. Pricing of the Issue
Once the IPO is approved by SEBI, the date for the issue (effective date) is decided. Before this effective date, the issuing company and the underwriter decide on the price and the number of shares to be issued. The factors which affect the price of the issue are –
- Roadshow’s result
- The goal of the company
- The economic condition of the country and also the world
The pricing is crucial as the price of the shares will be decided, the capital will be raised at that rate.
Most of the time, the issuing company keeps the pricing low or under-priced so that the whole of the issue is subscribed and even over-subscribed. This can be also done at the cost of the company not receiving the exact worth of the shares. Moreover, the investors of the IPO expect the price of the shares to rise on the day of offer and thus the demand for the shares increases. It also compensates for the risk-taking of the investors investing in the IPO.
A good IPO is something that is oversubscribed by 2-3 times.
4. Bidding Process – Book-Building:
Once the price is decided or the range of price is decided, the underwriter and the issuing company make the IPO available to the public for bidding. Only for small issues, a fixed price of the IPO is decided otherwise it is done through the Book-building process. Generally, 3-10 days are taken for the bidding process. If the IPO is fully subscribed or oversubscribed within the initial three to four days, then it is not extended more.
5. Allotment Process:
Once the issue is subscribed, the company and the underwriter needs to decide the IPO allotment of the shares to the investors. They need to decide the number of shares allotted to each of the investors when oversubscribed.
6. Lock-in-period and listing of the company:
The promoters of the company need to hold the shares for 3 years, which is 20% of the fully diluted equity share capital (post-offer), as per SEBI regulations. The Anchor investors need to hold the shares at least for 30 days. The listing of the company gets done after the IPO is processed fully and the shares are credited to the investor’s account (Demat account) after allotment. Now, these investors can sell or trade the shares in the secondary market once the company is listed in the exchange and secondary market.
So, a company needs to do these simple steps for IPO for issuing its shares to the public and becoming a public organization. Each of these simple steps for ipo is mandatory and crucial for successfully raising capital from the public. It has to be legal from every way to get the SEBI’s approval and the pricing needs to be low so that the issue is over-subscribed. For ipo allotment, the underwriter and the company need to be very logical so that they correctly allot the shares and finally get their company listed on the stock exchange.
No IPO found
|Issuer Company||Exchange||Issue Open|
|Yes Bank Ltd FPO||BSE, NSE||Jul 15, 2020|
|Rossari Biotech Ltd IPO||BSE, NSE||Jul 13, 2020|
|Reliance Industries Ltd. (RIL) Rights Issue||BSE, NSE|
|Antony Waste Handling Cell Ltd IPO||BSE, NSE||Mar 4, 2020|
|SBI Cards and Payment Services Ltd IPO||BSE, NSE||Mar 2, 2020|
|ITI Ltd FPO||BSE, NSE||Jan 24, 2020|
|Prince Pipes and Fittings Ltd IPO||BSE, NSE||Dec 18, 2019|
|Ujjivan Small Finance Bank Ltd IPO||BSE, NSE||Dec 2, 2019|
|CSB Bank Limited IPO||BSE, NSE||Nov 22, 2019|
|IRCTC Limited IPO||BSE, NSE||Sep 30, 2019|
|Issuer Company||Exchange||Issue Open|
|Billwin Industries Ltd IPO||BSE SME|
|Nirmitee Robotics India Ltd IPO||BSE SME||Mar 31, 2020|
|DJ Mediaprint & Logistics Ltd IPO||BSE SME||Mar 26, 2020|
|Laxmi Goldorna House Ltd IPO||NSE Emerge||Mar 20, 2020|
|Cospower Engineering Ltd IPO||BSE SME||Mar 17, 2020|
|RO Jewels Ltd IPO||BSE SME||Mar 12, 2020|
|SM Auto Stamping Ltd IPO||BSE SME||Mar 3, 2020|
|ICL Organic Dairy Products Ltd IPO||BSE SME||Jan 31, 2020|
|Chandra Bhagat Pharma Ltd IPO||BSE SME||Jan 31, 2020|
|Tranway Technologies Ltd IPO||BSE SME||Jan 27, 2020|