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Define IPO And Explain How It Works

IPO(Initial Public Offering) new shares offered to the public in the Primary market. When a company decides to raise capital, they often by selling shares of stock to public and the initial sale of a company’s stock is known as Initial Public Offering in the stock market. Companies offering IPO are not necessarily new company’s, sometimes companies which have been around for many years but are finally deciding to go public. An IPO can generate funds for working capital, debt repayment, acquisitions, and a host of other uses.

When a company decides to go public the company appoints underwriters and registrars of issue, it first involve one or more investment banks known as underwriters. The company and the investment bank first discuss some aspects like the amount of money a company will raise, the type of securities to be issued and all the details in the underwriting agreement. After the company secures an underwriter, it files a draft offer prospectus SEBI for review. This document contains information about the offering and company’s information like financial statements, management background, legal issues (if any), use of proceeds and risk factors. Once the draft document cleared by SEBI, it becomes offer document. Offer document is then submitted to registrar of the issue and stock exchange. Once offer document gets clearance from stock exchange, Issuer company makes it available to the public. The issue prospectus is now called as ‘Red Herring Prospectus’.


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Life Cycle Of An IPO

IPO Process Initialization

  • Appoint lead manager
  • Appoint registrar of the issue
  • Appoint underwriters.

Pre Issue Activities

  • Prepare draft offer prospectus document
  • File draft offer prospectus with SEBI for review
  • Promote company’s IPO

Prospectus Review

  • SEBI review draft offer prospectus
  • Ask for clarification or changes to Lead Manager (if required)
  • SEBI approve the draft offer prospectus, the draft offer prospectus is called as Offer Prospectus.

IPO Prospectus

  • Submit the Offer Prospectus to Stock Exchanges and registrar of the issue for approval
  • Decide the issue date & issue price
  • Update Offer Prospectus with the decided issue date and issue price. Now offer prospectus is called ‘Red Herring Prospectus’
  • Red Herring Prospectus & IPO Application Forms are distributed to investors through syndicate members.

Public Issue

  • Public Issue Open for investors bidding
  • Investors fill the application forms and submit to the syndicate members
  • Syndicate members provide the bidding information to BSE/NSE
  • Syndicate members send all the physically filled forms and cheques to the registrar

Price Fixing

  • Based on the bids received, lead managers decides the final issue price
  • Lead managers update the ‘Red Herring Prospectus’ with the final issue price and send it to SEBI and Stock Exchanges

IPO Applications Processing

  • Registrar receives all application forms & cheques sent by Syndicate members
  • Finalize the pattern for share allotment
  • Prepare ‘Basis of Allotment’
  • Transfer shares to the investors accounts

Stock Listing

  • Lead Manager with the help of Stock Exchange decides Issue Listing Date.
  • Finally share of the issuer company gets listed in Stock Market.

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