What is an IPO?

IPO or Initial Public Offer is a way for a company to raise money from investors for its future projects and get listed to Stock Exchange. Or An Initial Public Offer (IPO) is the selling of securities to the public in the primary stock market. Company raising money through IPO is also called as company  going public'. From an investor point of view, IPO gives a chance to buy shares of a company, directly from the company at the price of their choice (In book build IPO's). Many a times there is a big difference between the price at which companies decides for its shares and the price on which investor are willing to buy share and that gives a good listing gain for shares allocated to the investor in IPO. From a company prospective, IPO help them to identify their real value which is decided by millions of investor once their shares are listed in stock exchanges. IPO's also provide funds for their future growth or for paying their previous borrowings.

Who decides the Price Band?

Company with help of lead managers (merchant bankers or syndicate members) decides the price or price band of an IPO. SEBI, the regulatory authority in India or Stock Exchanges do not play any role in fixing the price of a public issue. SEBI just validate the content of the IPO prospectus. Companies and lead managers does lots of market research and road shows before they decide the appropriate price for the IPO. Companies carry a high risk of IPO failure if they ask for higher premium. Many a time investors do not like the company or the issue price and doesn't apply for it, resulting unsubscribe or undersubscribed issue. In this case companies' either revises the issue price or suspends the IPO.

Who decides the date of the issue?

Once  Draft Prospectus' of an IPO is cleared by SEBI and approved by Stock Exchanges then it's up to company going public to finalize the date and duration of an IPO. Company consult with the Lead Managers, Registrar of the issue and Stock Exchanges before decides the date.

What is a Rights Issue?

Rights Issue (RI) is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements.

What is SEBI s Role in an Issue?

Any company making a public issue or a listed company making a rights issue of value of more than Rs.50 lakhs is required to file a draft offer document with SEBI for its observations. The company can proceed further on the issue only after getting observations from SEBI. The validity period of SEBI s observation letter is three months only ie. the company has to open its issue within three months period.

Does it mean that SEBI recommends an issue?

SEBI does not recommend any issue nor does take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document.

What is the role of registrar of an IPO?

Registrar of a public issue is a prime body in processing IPO's. They are independent financial institution registered with SEBI and stock exchanges. They are appointed by the company going public. Responsibility of a registrar for an IPO is mainly involves processing of IPO applications, allocate shares to applicants based on SEBI guidelines, process refunds through ECS or cheque and transfer allocated shares to investors Demat accounts.

What is the role of Lead Managers in an IPO?

Lead managers are independent financial institution appointed by the company going public. Companies appoint more then one lead manager to manage big IPO's. They are known as Book Running Lead Manager and Co Book Running Lead Managers. Their main responsibilities are to initiate the IPO processing, help company in road shows, creating draft offer document and get it approve by SEBI and stock exchanges and helping company to list shares at stock market.

What is Follow on public offering or FPO?

Follow on public offering (FPO) is public issue of shares for already listed company.

What is primary & secondary market?

Primary market is the market where shares are offered to investors by the issuer company to raise their capital. Secondary market is the market where stocks are traded after they are initially offered to the investor in primary market (IPO's etc.) and get listed to stock exchange. Secondary market comprises of equity markets and the debt markets. Secondary market is a platform to trade listed equities, while Primary market is the way for companies to enter in to secondary market.

What is the life cycle of an IPO?

Below is the detail process flow of a 100% Book Building Initial Public Offer IPO. This process flow is just for easy understanding for retail IPO investors. The steps provided below are most general steps involve in the life cycle of an IPO. Real processing steps are more complicated and may be different. Please visit SEBI website, stock exchange website or consult an expert for most current information about IPO life cycle in Indian Stock market.

1. Issuer Company - IPO Process Initialization

1. Appoint lead manager as book runner.

2. Appoint registrar of the issue.

3. Appoint syndicate members.

 

2. Lead Manager's - Pre Issue Role - Part 1

1. Prepare draft offer prospectus document for IPO.

2. File draft offer prospectus with SEBI.

3. Road shows for the IPO.

 

3. SEBI  Prospectus Review

1. SEBI review draft offer prospectus.

2. Revert it back to Lead Manager if need clarification or changes (Step 2).

3. SEBI approve the draft offer prospectus, the draft offer prospectus is now become Offer Prospectus.

 

4. Lead Manager - Pre Issue Role - Part 2

1. Submit the Offer Prospectus to Stock Exchanges, registrar of the issue and get it approved.

2. Decide the issue date & issue price band with the help of Issuer Company.

3. Modify Offer Prospectus with date and price band. Document is now called Red Herring Prospectus.

4. Red Herring Prospectus & IPO Application Forms are printed and posted to syndicate members; through which they are distributed to investors.

 

5. Investor  Bidding for the public issue

1. Public Issue Open for investors bidding.

2. Investors fill the application forms and place orders to the syndicate members (syndicate member list is published on the application form).

3. Syndicate members provide the bidding information to BSE/NSE electronically and bidding status gets updated on BSE/NSE websites.

4. Syndicate members send all the physically filled forms and cheques to the registrar of the issue.

5. Investor can revise the bidding by filling a form and submitting it to Syndicate member.

6. Syndicate members keep updating stock exchange with the latest data.

7. Public Issue Closes for investors bidding.

 

6. Lead Manager  Price Fixing

1. Based on the bids received, lead managers evaluate the final issue price.

2. Lead managers update the 'Red Herring Prospectus' with the final issue price and send it to SEBI and Stock Exchanges.

 

7. Registrar - Processing IPO Applications

1. Registrar receives all application forms & cheques from Syndicate members.

2. They feed applicant data & additional bidding information on computer systems.

3. Send the cheques for clearance.

4. Find all bogus application.

5. Finalize the pattern for share allotment based on all valid bid received.

6. Prepare 'Basis of Allotment'.

7. Transfer shares in the demat account of investors.

8. Refund the remaining money though ECS or Cheques.

 

8. Lead manager  Stock Listing

1. Once all allocated shares are transferred in investors dp accounts, Lead Manager with the help of Stock Exchange decides Issue Listing Date.

2. Finally share of the issuer company gets listed in Stock Market.

 

What is the difference between an offer document, Red Herring Prospectus, a prospectus and an abridged prospectus? What does it mean when someone says  draft offer doc ?

 Offer document means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue, which is filed Registrar of Companies (ROC) and Stock Exchanges. An offer document covers all the relevant information to help an investor to make his/her investment decision.  Draft Offer document means the offer document in draft stage. The draft offer documents are filed with SEBI, atleast 21 days prior to the filing of the Offer Document with ROC/ SEs. SEBI may specifies changes, if any, in the draft Offer Document and the issuer or the Lead Merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC/ SEs. The Draft Offer document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI.