What is the life cycle of an IPO? Process
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- Updated On:19-Feb-2021
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Short Answer
An IPO or Initial Public Offering is where for the first time an earlier unlisted company sells new or existing securities and offers them to the public in the primary market.
Detailed Answer
A company before an IPO is considered to be private with a small number of shareholders, whereas after an IPO the issuing company is recognized as a publicly listed company as it reaches its growth stage where it can obtain a huge amount of capital.
This provides the company to increase the profit potential and a key time for private investors to cash in and earn their expected returns. The public market opens up a massive opportunity for investors to buy shares in the company and contribute capital to a company’s shareholders' equity.
The Life Cycle of an IPO
Let's have a look at the IPO process of a company going public for the first time i.e. Initial Public Offering steps explained in easy manner.
1. Choose an Investment Bank
The first step in the IPO process is for the issuing company to choose an investment bank to direct the company on its IPO and to provide underwriting services. While selecting an investment bank the reputation, research quality, industry expertise, and prior relationship with the bank must be noted.
2. Due Diligence and Regulatory Requirement
The process by which an investment bank acts as a middleman between the issuing company and the investor while helping the issuing company to sell the initial set of shares is called underwriting. There are many underwriting arrangements that are open to the issuing company including -
● Firm Commitment
● Best Efforts Agreement
● All or None Agreement
● Syndicate of Underwriters
There are a number of documents that an underwriter must draft such as,
● Engagement Letter
● Letter of Intent
● Underwriting Agreement
● Registration Statement
● Red Herring Document
3. Fixing Price
After the approval by the SEC, an effective date is decided before which both the issuing company and the underwriter fix the price at which the shares will be sold by the issuing company. This price is at which the issuing company raises capital for itself.
An underpriced IPO is when the investor can expect a rise in the price of the shares on the offer day. It also increases the demand for the issue. An offer oversubscribed is considered to be a good IPO.
4. Market Creation for the Stock
The underwriter provides the recommendation of an analyst to create a marker of the stock issued. The underwriter has the liberty to trade and change the price of the issue as prohibitions against price manipulation are suspended.
5. Market Competition
In the final stage of the IPO process, the market competition starts after 25 days of the IPO. After the period lapses, underwriters provide an estimate regarding the earning and valuation of the issuing company.
Conclusion
An IPO is primarily a fundraising method used by massive companies, in which the company sells its shares to the public for the first time. Some of the central reasons for undertaking an IPO include - raising capital from the sale of the shares, providing liquidity to company founders and early investors, and taking advantage of a higher valuation.
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IPO prospectus is the document which gives information to the investors about the company statistics before they issue shares in public. It is mainly a 3 step process. For detailed description, read through the blog below.
ASBA or Application Supported by Blocked Amount is an alternative payment method to apply or bid for an IPO. However, it is currently available to only the Retail Individual Investors and you also need to fulfill certain requirements for the same.
While applying for an IPO a person either uses the UPI or ASBA facility for the payment and in both the process the total amount of money remains blocked by the bank under a "Mandate" until the allotment process is finalized hence the amount remains in the bank account of the investor and only gets debited if he/she receives the allotment of the shares.
The SEBI (Securities and Exchange Board of India) requires every IPO to get at least an overall 90% subscription to proceed to the allotment process. If an IPO fails to get a 90% overall subscription (including the QIB, NII, and Retail category) by the last day of the issue then the IPO is cancelled and the money collected from the investors is refunded back.
No, applying for an IPO does not guarantee you nay shares that would be allocated to you. Simply, applying is no surety to getting the shares as well.
If you are a Zerodha customer, you can apply for IPO online through Zerodha Console (Zerodha Back-office). The process for applying an IPO process has been explained in detail above. Here are few other answers to important queries that you may want to learn.
There are many drawbacks such as up-front costs, liability augmentation, extensive decision-making processes, reporting costs increase exponentially, etc. These are just a few; based on the company's performance, many other drawbacks might arise.
Yes, you can apply for an IPO application under a minor or HUF's name, provided they have different PAN card numbers. Minors can open a Demat account with their parent’s PAN Card and bank account.
There are many ways to check the IPO allotment status but Zerodha doesn't provide this facility on their website.** To check the allotment status you can visit the website of the registrar of the IPO**, for example, Link Intime, Karvy. With the help of a PAN number, you can easily check the status.
Stoxkart online discount broker also provides IPO investment facility to clients. The best part is that stoxkart facilitates both the Indian as well as NRIs to invest in IPO online.