Why Is The IPO Process So Baroque?
What is an IPO?
An Initial Public Offering (IPO) is a process that allows corporations to raise funds from the general public. It is the public debut of a corporation. Companies can issue their new shares to the public in the primary stock market via an IPO. It can be a new company or an old established one which meets all the eligibility parameters under the regulatory framework.
It is big news in the stock market when a company declares its IPO. It changes the status of a private company to a public company. Companies issuing IPOs are borrowers in the primary market, and investors are shareholders who become partial owners of the company. Most IPOs are open to retail investments.
Why is the IPO Process Complex?
IPO is a complex process as companies are bound to follow many guidelines specified by the SEBI (Securities Exchange Board of India) for an IPO issue. The time it takes to get completed depends on several factors. It can take as long as six to nine months with proper management.
With the following outline, investors can get an idea of the steps an upcoming IPO company needs to complete as per the SEBI’s regulatory framework:
Outline to Complete an IPO Process
- Hiring Underwriter or Investment Bank
Companies need to hire a team of financial experts who can carry out the entire IPO process. Underwriters or investment banks act as intermediaries between the company and the investors. They study the company’s financial standing, assets, and liabilities and find out its requirements that can cater to its financial needs. They determine the funds being raised based on crucial financial parameters.
- IPO registration with DRHP (Draft Red Herring Prospectus)
As per Section 32 of the Companies Act, India, investment banks draft a prospectus for the company’s IPO and submit it to the SEBI for IPO registration. It contains details about the IPO, the company’s finances, management standards, the use of IPO funding, risks involved in its business, and much other crucial information. It is the most important document for retail investors. DRHP can help investors in evaluating the worthiness of the investment in the IPO with the knowledge of the risk involved. Investors with a demat account can make online IPO applications. The demat account opening online process is fast enough to grab investment opportunities.
- Verification by the SEBI
- The SEBI verifies the financial statements and other facts and documents submitted by the company. Once the SEBI is satisfied, it can nod for the IPO. The company can set a date for the IPO opening.
- Registration with Stock Exchanges
The company needs to get registered with a stock exchange to float its IPO issue. It is the secondary market where IPO shares get listed after the completion of the IPO process and can be traded using a demat and trading account online.
- Marketing Buzz
The company wants its IPO to be a big event. For successful IPOs, companies are allowed to promote their IPOs at important finance destinations and attract more investors.
- IPO Pricing
An IPO company can follow the Fixed Price IPO process or the Book Binding process. Most companies prefer the book-building process as it is considered an opportunity to discover the price and demand and generate a high amount of capital.
- IPO allotment
IPO issues are open for applications from investors for a fixed period, usually about five working days. Once the IPO applications are closed, it is determined if it is an oversubscribed issue or undersubscribed. The company starts to share allotments to investors accordingly. Investors can get their shares within ten days after the closing of IPO bidding.
This way an IPO process is completed and takes a long time to get completed. Investors should get ready with their demat accounts to grab IPO opportunities and grow their funds over a period.