IPO Approval Process in India

Phase 2: IPO Filing and Marketing

In recent years, so many new IPOs have come, and you must be applying to them - for listing gains or long-term. But have you ever thought about why companies launch IPOs and what is the exact process? In this article, we look at the other side - and discuss everything related to IPOs from the company's perspective - the need, process, and factors the company considers.

The Need for IPO

Let us start with the basics - why a company launches an IPO in the first place. There are many reasons for it, but here are the top 3 reasons for doing it:

• Capital Raising: Every business needs money to grow. The primary purpose of an IPO is for companies to raise fresh capital. This capital can be used for various purposes like funding expansion plans, research and development, debt repayment, or acquisitions. By selling shares to the public (investors like you), companies gain access to a large pool of funds that would not be readily available through traditional loans or private investments.
• Increased Liquidity: An IPO provides liquidity to the company's founders and early investors. They can sell their existing shares to the public, potentially realizing significant returns on their initial investment. Before the IPO, they only had paper wealth - IPO allows them to unlock the true value.
• Public Credibility and Brand Awareness: A successful IPO can significantly enhance a company's public image and brand recognition. Being listed on a stock exchange demonstrates a certain level of financial stability and transparency, which can attract new customers, partners, and talent.

IPO Process: Detailed Steps

The IPO process can be divided into three phases. And each phase has multiple steps. Let us look at the three phases and each step in detail.

Phase 1: Pre-IPO

Here are the different steps in this phase:

• Planning: The company's initial groundwork involves setting strategic goals for the IPO, assembling a strong internal team, and potentially hiring external advisors like investment bankers and lawyers.
• Selection of Lead Manager: The company solicits proposals from investment banks to manage the IPO process. Factors like reputation, experience, and distribution network are crucial in choosing the right underwriter.
• Due Diligence: The underwriter conducts a thorough due diligence process, meticulously examining the company's financial health, legal standing, and future prospects. This protects both the company and potential investors.
• Pre-IPO Funding: The company might seek pre-IPO funding rounds from venture capitalists or angel investors to prepare for the IPO process and potentially fuel growth.

Phase 2: IPO Filing and Marketing

Here are the different steps in this phase:

• Drafting the Draft Red Herring Prospectus (DRHP): This document details the company's financial information, business plan, management team, and risk factors involved in investing in the IPO. It requires approval from the Securities and SEBI.
• Publish Red Herring Prospectus (RHP): Once SEBI approves the DRHP, a revised version called the RHP is prepared. This omits the pricing details but provides a comprehensive overview of the IPO for potential investors.
• Marketing and Investor Roadshows: The company and underwriter embark on a marketing blitz, showcasing the company's potential to institutional investors and the public through roadshows, presentations, and media outreach.

Phase 3: Price Discovery and IPO Launch

In this final phase, the company launches the IPO. Here are the different steps in this phase:

• Book Building and Price Discovery: The underwriter gauges investor interest through a book-building process. Based on demand, a final IPO price is determined that balances the company's fundraising goals with investor expectations.
• SEBI Listing Approval: After finalizing the price, the company seeks approval from the stock exchange (NSE or BSE) for listing its shares.
• IPO Launch and Share Allotment: Once SEBI and the stock exchange grant approval, the IPO officially launches on the designated date. Shares are allotted to investors based on their bids during the book-building process.
• Listing and Trading: The company's shares begin trading on the chosen stock exchange, marking its official entry into the public market.

Factors the company considers before applying for an IPO

Going public through an Initial Public Offering (IPO) is a significant decision for any company. Here are the key factors a company considers before applying for an IPO:

• Profitability: Sustained profitability or a clear path to profitability reassures potential investors.
• Cash Flow: Positive cash flow from operations indicates financial health and the ability to sustain business activities.
• Market Sentiment: Favorable market conditions and investor sentiment can lead to a successful IPO. Poor market conditions can affect the valuation and success of the offering.
• Industry Trends: Industry-specific trends and growth prospects can influence the decision. A thriving industry can attract more investors.
• Corporate Governance: Establishing strong corporate governance practices, including a well-functioning board of directors, is crucial for gaining investor confidence.
• Financial Reporting: Accurate and transparent financial reporting and compliance with regulatory requirements are essential.

Before you go

IPOs are a significant financial event for both companies and the stock market. They provide companies with a path to raise capital and build public recognition while offering investors new avenues for investment and market diversification.