IPO Process in India: Understanding the ABC of IPOs

In recent years, India has seen a remarkable increase in Initial Public Offerings (IPOs) , with companies going public and attract both domestic and international investors, across the retail and institutional spectrum.So much so, in 2022, the Indian stock exchanges ranked third in the world in terms of IPOs with as many as 22 IPOs going live collecting a cumulative sum of Rs. 59,939 crores . This number was even higher in 2021, with 63 IPOs collecting Rs. 119,882 crores .But what exactly is an IPO process in India and how does it unfold?

The IPO process is the procedure through which a privately owned company offers its shares to the public for the first time. In plain language, it is when a company decides to transition from being a privately held to a publicly traded entity.During an IPO procedure, the company sells newly created shares or existing shares to investors at an offering price set by the company and the IPO underwriters .After the IPO closes, the shares are listed on a stock market , such as India's Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). This listing permits the shares to be freely traded in the secondary market among investors.In India, the entire IPO process has to follow rules and guidelines laid down by the market regulator – the Securities and Exchange Board of India (SEBI).

The IPO procedure consists of numerous critical phases that a company must perform to effectively go public. While specifics may vary based on the country and regulatory requirements, the primary steps IPO process in India are:

Step 1: Preliminary Planning

The company's management, along with key stakeholders, analyses the preparedness and feasibility of embarking on a public offering. This entails a comprehensive evaluation of the company's financials, growth potential, market conditions, and regulatory compliance requirements. Through this thorough assessment, they seek to ensure a firm grasp of the company's standing and its readiness to navigate the complexities of the public market.

Step 2: Selection of Underwriters

The company selects investment banks or an underwriter to help manage the process. These underwriters have dominant responsibilities such as:

• IPO underwriters work closely with the issuing body to determine the initial offering price of the securities using a combination of factors like company profitability, market perception, cash flows, asset valuation, etc. to value its shares.
• They empower the company to proactively prepare for the IPO process, by considering critical factors such as determining the appropriate fundraising target, strategically selecting the securities to be issued, and establishing a mutually beneficial agreement between the underwriter and the company.
• During the IPO, an underwriter can purchase the entire IPO issue and sell it to investors, using their distribution network.
• They create a market for the stock by contacting a wide range of institutional investors, including mutual funds, insurance companies, pension funds, and more.
• Once the issue is on the market, the underwriter guides, stabilizes, and establishes a market for the issued stock.
• Takes on the roles of advisor and evaluator after the issue has been launched.

Step 3: Due Diligence

The organization undergoes a due diligence process, which includes a thorough analysis of financial accounts, legal and regulatory compliance, corporate governance practices, and potential risks.This phase ensures that all vital information pertaining to the IPO is effectively communicated to prospective investors.By conducting this comprehensive evaluation, the organization aims to provide potential stakeholders with a transparent and accurate portrayal of the IPO, enabling them to make well-informed investment decisions.

Step 4: Drafting the Prospectus

As part of the IPO process in India , a prospectus is prepared by the company in consultation with its legal and financial experts. This document contains in-depth information on the firm, such as its business plan, financials, risk factors, industry overview, and anticipated use of IPO proceeds.The prospectus must adhere to regulatory rules and provide potential investors with openness. This document also functions as a marketing material to rope in investors.

Step 5: SEBI Filings and Approval

The IPO requirements in India include prospectus and other required documentation to be submitted to the appropriate regulatory authorities, the primary one being SEBI.Subject to conformity with applicable rules, the regulatory authority evaluates the filings and issues approval for the IPO.

Step 6: Roadshow and Investor Presentations

The company and its underwriters go on a roadshow to promote the IPO to potential investors. Presentations and meetings with institutional investors, analysts, and other interested parties are part of this process. The purpose of the roadshow is to raise interest in the IPO and gauge investor demand.

Step 7: Pricing and Allocation

The company, in conjunction with its underwriters, determines the ultimate offering price and quantity of shares to be offered, considering investor response and prevailing market circumstances. Subsequently, the shares are allocated to various types of investors – institutional investors, retail investors, and corporate personnel.

Step 8: IPO Subscription and Allotment

The IPO subscription period begins, allowing investors to purchase the offered shares. Once the subscription period has ended, the shares are distributed to investors as per the allocation criteria established by the firm and the underwriter .

Step 9: Listing on Stock Exchanges (NSE and BSE)

Following the allocation, the company's shares are listed on the stock exchange and may be traded publicly. Depending on the company's choices and legal restrictions, the listing may take place on numerous stock exchanges.

Step 10: Post-IPO Compliance

Following the IPO, the company must continue to meet ongoing compliance requirements such as periodic financial reporting, transparency requirements, and corporate governance standards. These standards must be followed to ensure openness and responsibility towards shareholders and regulatory bodies.Also Read: What are the Trading Hours for World's Major Stock Exchanges?

The duration required to complete th e IPO procedure in India can vary depending on several factors. Even if a company fully satisfies the regulations, it can take anywhere between four months to a year to complete the public debut.However, the entire operation generally takes four to six months and involves filing a draft prospectus for approval by SEBI.The process of submitting the draft document to SEBI for review can take between two to four months.Also, the length of an IPO process varies, depending on the company.

The duration of the IPO process in India depends on several factors. While each IPO is unique, the following factors can significantly change the pre-planned duration of the IPO:

• Regulatory Approvals: IPO processes in India follow SEBI guidelines . Obtaining the requisite SEBI approvals is a critical stage in the procedure. The time it takes to receive these approvals might vary based on factors such as the prospectus's completeness and correctness, the complexity of the business, and the timeliness of the firm.
• Due Diligence and Document Preparation: Thorough due diligence, prospectus preparation, and acquiring the relevant documentation are all time-consuming activities. Financial audits, legal compliance assessments, and the disclosure of all necessary information are all part of this. The length of time required for these tasks might be influenced by the complexity and size of a company.
• Market Conditions and Investor Sentiment: The timing of an IPO can be influenced by overall market circumstances and investor mood. Companies may opt to postpone or accelerate their IPO plans depending on market conditions. If market circumstances are unfavourable, corporations may wait for better conditions, which may result in a lengthier IPO process.
• Underwriting Process: Engaging underwriters and selecting the offering price can be time-consuming. Underwriter IPO supports the company with pricing, marketing the IPO, and collaborating with regulatory agencies. The underwriting process's arguments and discussions might influence the schedule.
• Roadshow and Investor Demand: The roadshow, in which the firm presents its investment case to potential investors, is an important component of the IPO process . The time it takes to generate investor demand and gather indications of interest might have an impact on the entire time frame.
• Compliance and Listing Requirements: Companies must meet the compliance standards and listing criteria of the stock exchanges where their shares will be listed. Adherence to corporate governance norms, financial reporting duties, and achieving minimum capitalization requirements are all part of this. The time required to complete these regulations may influence the IPO timetable.

In an IPO, the documentation process entails compiling and submitting numerous documents to regulatory agencies, underwriters, and potential investors. The following is the standard paperwork involved:

1. Draft Red Herring Prospectus (DRHP): The DRHP is a preliminary prospectus that gives thorough information on the firm, its business activities, financials, risk factors, and IPO objectives. It is submitted to a regulatory authority for examination and approval, such as from SEBI.
2. Red Herring Prospectus (RHP): The RHP is the final prospectus, which includes any revisions or adjustments made throughout the regulatory review process. It contains the same detailed information as the DRHP and is distributed to prospective investors during the IPO subscription period.
3. Memorandum and Articles of Association: These are the company's constitutional papers. The Memorandum of Association explains the company's goals and powers, whereas the Articles of Association include the rules and regulations that regulate the company's internal operations and management.
4. Audited Financial Statements: Companies must furnish audited financial statements for the last three to five years, comprising the balance sheet, income statement, cash flow statement, and statement of changes in equity. These statements give an in-depth analysis of the company's financial performance and status.
5. Legal and Regulatory Disclosures: Any legal processes, lawsuits, conflicts, or regulatory actions concerning the company, or its directors must be disclosed. This includes disclosing details regarding outstanding litigation, investigations, or regulatory compliance concerns that might have a major impact on the company's operations or financials.
6. Corporate Governance Reports: Companies must provide reports on their corporate governance practices, including information on the membership of their boards, committees, related-party transactions, and codes of conduct. These reports illustrate the company's dedication to openness and sound governance.
7. Management Discussion and Analysis: This portion of the prospectus contains information about the company's activities, strategy, prospects, and dangers. It contains talks on industry dynamics, market trends, competition, and the company's market positioning.
8. Underwriting Agreement: This agreement is made between the company and the underwriters in charge of the IPO. It specifies both parties' responsibilities and obligations, including the underwriters' pledge to acquire and distribute the shares to investors.
9. Legal Opinions: The company's legal counsel provides legal advice to authenticate the legitimacy of the IPO process , compliance with rules, and the integrity of the disclosure papers.
10. Other Supporting Documents: Additional papers, such as licenses and permissions, intellectual property registrations, contracts, and other important agreements may be necessary depending on the company's industry, unique requirements and circumstances.

Given below is a step-by-step guidance for retail investors to apply for shares in an IPO: Step 1: First, you need to check if you meet the eligibility requirements for participating in the given IPO. These requirements may vary depending on the brokerage firm, but typically include having a certain account balance or trading activity. Step 2: If you meet the eligibility requirements, you need to have an account with a brokerage firm that participates in IPOs. You can do this via the broker’s portal. Step 3: Check for upcoming IPOs that you are interested in and that your brokerage firm is participating in. You can do this by checking the IPO calendar on the brokerage firm's website or app. Brokers often provide information and updates about ongoing IPOs, like:

• Rainbow Children’s Medicare Ltd. IPO
• Veranda Learning Solutions Ltd. IPO
• Paradeep Phosphates Ltd. IPO
• Aether Industries Ltd. IPO

Step 4: Once you have identified an IPO that you want to invest in, you can place an order through your brokerage firm. You will need to specify the number of shares you want to buy and the price you are willing to pay, which should be within the permitted bandwidth. Step 5: After you have placed an order, you will need to wait for the allocation of shares. The allocation process may take a few days, and the number of shares you receive may be less than the number you requested. Step 6: Once the IPO shares are allocated to you, you can trade them on the secondary market just like any other stock.Also Read: 6 Things You Should Know About the RBI Retail Direct Scheme

Investing in an IPO is just as risky as investing in any other equity instrument. Principally, you need to consider certain factors before you invest, like your investment time horizon, your understanding of the fundamentals of the business, risks, and valuation among others. Here are 5 must-know things before investing in an IPO.

Many IPOs have been conducted in India, leading to huge amounts being raised. Some of them are as follows:

While taking the IPO route is common for companies to raise capital and become publicly traded, there are alternative options available to access funding or provide liquidity to their shareholders.Some of the notable alternatives to IPOs include are as follows:

1. Direct Listing A direct listing allows a company to go public without having to issue new shares or raise fresh funds. Existing shareholders, including staff and early investors, can instead sell their shares to the public. This strategy offers stockholders liquidity while avoiding the typical underwriting procedure and its accompanying costs. Spotify and Slack are two notable startups that have chosen direct listings.
2. Private Placements Companies can obtain funds through private placements rather than issuing shares to the public through an IPO. A private placement is a transaction in which a company sells shares to a small group of institutional investors, private equity companies, or accredited investors. This strategy allows businesses to obtain cash without having to comply with the same amount of regulatory regulations and public disclosure duties as an IPO. Such investors may also offer the company management flexibility in business operations, which may be difficult if retail investors are present.
3. Venture Capital and Private Equity Funding Startups and growth-stage businesses frequently seek investment from venture capital (VC) or private equity (PE) organisations. These financiers contribute funds in exchange for stock or ownership holdings in the company in question. VC and PE capital may provide companies with flexibility, strategic assistance, and industry contacts while deferring or avoiding the challenges of going public.
4. Crowdfunding Crowdfunding platforms have grown in popularity as an alternate way to raise cash, particularly for early-stage businesses. Companies can raise cash from a large number of individuals who give small sums through crowdsourcing. Companies may use such platforms to display their products, services, or ideas to a large audience and obtain financial support in exchange.
5. Special Purpose Acquisition Companies (SPACs) SPACs have emerged as a viable alternative to going public. A shell corporation is formed solely for the goal of purchasing an existing private firm and taking it public. The SPAC acquires cash through its own IPO and then utilises the proceeds to combine with a target company, essentially taking the target company public. SPACs have gained popularity due to their shorter timelines than regular IPOs.
6. Mergers and Acquisitions (M&A) Companies may opt to merge with or be purchased by another firm rather than going public. M&A deals can give existing shareholders liquidity while also providing prospects for expansion through synergies with the acquiring firm. M&A transactions can take several forms, including stock purchases, asset purchases, and mergers of equals.

Each alternate approach has its own set of benefits, drawbacks, and regulatory concerns. When contemplating these alternatives to an IPO, companies should carefully analyse their individual goals, finance requirements, and strategic objectives. Consulting with legal and financial consultants may assist businesses in navigating the intricacies and making educated decisions about the best path for their unique situation.