7 Stages of the IPO Process in India

Introduction

Initial Public Offering (IPO) is a process for a company to raise capital by offering shares to the public for the first time. The IPO process in India involves various regulatory and administrative steps. A company must adhere to these steps before listing its shares on a stock exchange, such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE).

Understanding the IPO process steps in India is essential if you want to invest in an IPO. It can offer insights into how companies transition from privately held to publicly traded entities. For example, the LIC IPO showcased the complexity and strategic planning involved in bringing a major public sector undertaking to the stock market. It offered investors a unique opportunity to participate in the company’s growth journey from its inception as a government entity to a publicly listed corporation.

Let’s understand the IPO process and how each step is crucial for any company.

Why is an IPO Process Important?

The IPO route allows any privately held company to become publicly traded in India. Generally, companies use the IPO route to raise capital for various reasons such as expansion plans, improving liquidity, etc. This process allows companies to offer their shares or stocks to the public. 

What are the IPO Process Steps in India?

Taking a company public through an Initial Public Offering (IPO) involves several steps and requires careful planning and execution. Let’s delve into the details of the IPO procedure in India:

Placeholder for infographic - Show process flow/steps in a flowchart format

Step 1: Appointment of Merchant Banker

The first crucial step in the IPO process is selecting an investment bank, also known as the underwriter. This bank will guide the company through the IPO journey. Companies may choose banks based on factors such as their reputation, industry experience, and size. 

For instance, Zomato selected Kotak Mahindra Capital, Morgan Stanley, Credit Suisse, Bank of America, and Citi as the investment banks for its IPO back in 2021. 

Step 2: Approval from SEBI / Exchange on Draft Offer Documents

Once a company has selected an investment bank, it must undergo due diligence. Here, the investment bank scrutinises the company’s financial health, business model, and operational strategies to ensure everything is in order. The company then prepares and files necessary documents with the Securities and Exchange Board of India (SEBI).

Simultaneously, the IPO-bound company must also seek in-principle approval from the stock exchange, such as BSE or NSE. This step ensures that the company meets all listing requirements and regulations. The exchange reviews the company's details and gives a preliminary nod, which is essential before the final approval.

Step 3: Filing of Offer Documents with Exchange/s

The prospectus is a critical document in the IPO process. Initially, a preliminary prospectus, the Draft Red Herring Prospectus (DRHP), is issued. In this document, the company outlines its operations, financial status, and the purpose of the IPO. Generally, DRHP does not contain specific details like the share price and number of shares to be offered.

The DRHP is filed with SEBI, where it undergoes a thorough review process. SEBI examines the DRHP to ensure that all regulatory requirements are met and the information provided is accurate and comprehensive. Once SEBI reviews and approves the DRHP, the final prospectus is prepared, which includes all the necessary details. This is also known as RHP or Red Herring Prospectus. The RHP is the final version of the prospectus, which incorporates SEBI's feedback and provides definitive details about the IPO.

Also Read - What is DRHP

Step 4: IPO Road Shows

Marketing the IPO involves a roadshow where the company’s management and underwriters present the investment opportunity to potential investors. They conduct these presentations in major cities and financial hubs to attract interest from institutional and retail investors. The management team explains the company's business model, financial health, and growth prospects. 

For example, if an Indian startup plans an IPO, it might hold sessions in major cities, showcasing its pitch to large investors like mutual funds and insurance companies. The startup might also leverage digital platforms for virtual presentations and engage with financial analysts to publish favourable reports, increasing its visibility and credibility among potential investors.

Step 5: Price Determination

Based on the feedback from the roadshow, the company and its underwriters decide on the final price of the shares. If demand is high, the shares might be priced at the higher end; if demand is low, the price could be set at the lower end.

Companies use different pricing methods in their IPO process, such as fixed price and book building. In a fixed-price IPO, the price is set in advance. In a book-building IPO, you bid within a provided price range, and the final price is determined by these bids.

Example: If a company sets a book-building price range of ₹100 to ₹120, and demand is high, the final price might be ₹120. If demand is low, the price might be ₹100. In a fixed-price IPO, the company may set the price at ₹110, for instance. This means you will know exactly what you will pay per share while applying for the IPO.

Step 6: IPO Bidding Period and Allotment of Shares

After finalising the pricing, the company opens the IPO bidding period, usually 3-5 days. During this time, you can place your bid for a certain number of shares within the price range set by the company. Once the bidding period ends, the company allocates shares to investors. It ensures a balanced distribution of shares between institutional and retail investors to maintain a stable share price post-listing.

Companies generally reserve a portion of shares for different categories of investors, such as Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs), and Retail Individual Investors (RIIs).

Step 7: Listing of Shares

The next step is the IPO listing process in India. Once the shares are allocated, they are listed on stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). On the listing day, the shares start trading, and their prices can fluctuate based on market demand and supply. For instance, if a company like Zomato goes public, its shares will begin trading on the BSE and NSE, allowing investors to buy and sell shares in the open market.

Listing Timelines:

The Securities and Exchange Board of India (SEBI) has recently reduced the timeline for listing shares in a public issue from T+6 days to T+3 days. This means the shares must be listed and start trading within three working days after the IPO closes.

Step 8: Post-IPO Documentation

After the IPO, the company must comply with regulatory requirements and disclosures. This includes regular financial reporting and adhering to governance standards set by SEBI. There may also be lock-up periods, during which promoters and other key shareholders are restricted from selling their shares for a specified period to prevent a sudden drop in share prices.

For instance, when Zomato went public, its promoters had a lock-up period of one year, which helped maintain stability and build investor confidence during the initial months.

The Serious Truth You Should Know About IPOs

In 2023, India saw an unprecedented rise in IPOs, with 184 companies going public. This notable achievement outpaced major markets such as the US, China, and Hong Kong. The surge underscores strong economic activity and positive investor sentiment, reflecting India's robust and dynamic financial landscape.

Noteworthy IPOs from 2023 included Tata Technologies and Netweb Technologies, both of which received significant investor interest. Companies like Swiggy and Ola Electric are expected to make their market debuts soon, continuing the trend of strong IPO activity in India.

Conclusion

The IPO process in India is a multi-faceted journey that transforms a private company into a public one. For Indian companies, this involves meticulous planning, regulatory compliance, and strategic marketing to attract investors. Understanding each step of the process can help companies navigate their way to a successful public listing, ultimately providing them with the capital needed for growth and expansion.

To better understand the IPO process and various aspects of stock market investments, check out the detailed resources available at Sharekhan Education.