IPO Process: A Step-by-Step Guide

An IPO is a multi-step process that has to adhere to certain rules and regulations at each step. In India, IPO process is organized and regulated so that transparency and fairness are maintained.

The initial step in the IPO process is appointing a Merchant Banker or the Lead Manager. This financial specialist registered with SEBI guides the company through the entire process of an IPO—from the planning stage and regulatory compliance to listing and post-listing phases.

The Merchant Banker cooperates closely with the issuing firm to prepare the due diligence and prepare the Draft Red Herring Prospectus (DRHP) containing significant financials, business information, and risk factors to prospective investors.

After the Draft Red Herring Prospectus (DRHP) is ready, it's filed with SEBI (Securities and Exchange Board of India) for approval. SEBI scrutinizes the document carefully to make sure all disclosures are proper, complete, and as per regulatory norms. This usually takes between 2 to 4 months.

Subsequent to the scrutiny, SEBI either approves or asks for clarifications or revisions before proceeding.

After the go-ahead by SEBI, the merchant banker files the IPO application and the DRHP with the stock exchanges on which listing is planned by the company. The exchange approves the application in-principle after considering it, thereby releasing the process.

The company and its merchant bankers decide on the pricing of the IPO at this point. There are two standard practices:

This process assists in testing investor demand and finding a reasonable market price for the shares.

The company then finalizes and files the Red Herring Prospectus (RHP) with the stock exchanges. This is a revised version of the DRHP, with the most recent financials, confirmed IPO dates, price band information, and other important disclosures necessary to assist investors in making an informed decision.

To generate hype and draw investors, the company—along with its merchant bankers and PR firm—has a roadshow. This involves promotional events, investor conferences between cities, and analyst, journalist, and media houses' sessions. The aim is to generate awareness and create interest in the IPO.

Before the IPO opens to the general public, it's reserved for anchor investors—quality institutional buyers (QIBs) who invest big sums (usually ₹10 crore or more). These investors are allocated shares one day prior to the IPO opening to the public, usually as an indication of confidence in the issue.

Lastly, the IPO is offered to retail and institutional investors. The bidding period usually lasts between 3 to 10 days, whereby investors make bids for shares.

Applications are made via brokers or banks in the IPO platform of the stock exchange. A distinct IPO application number is provided to every applicant. Yet, making a bid does not assure allotment—since shares are usually allocated through a lottery in excess-demand IPOs.

After the IPO bidding window closes, the stock exchange passes on all application information to the IPO registrar who is in charge of the allotment process.

This is the process:

• Application files are transmitted by the stock exchange to banks to ensure the demat account and bank account used in each application are registered in the name of the same person.
• Banks check the account details. If they don't match, or if it's identified as a third-party application, the registrar rejects it.
• After removing invalid applications, the registrar performs a lottery (in case of oversubscription) or pro-rata allotment to distribute shares evenly.
• The amount for allotted shares is deducted from the investor's bank account.
• Allotted shares are credited to the investor's demat account.

Following allotment, the firm is made ready to be listed.

• Files required listing documents with the stock exchange
• Sends a credit confirmation from the depository, indicating that shares are credited to investors
• The stock exchange issues a listing circular with final information like the listing date, issue price, ISIN, and stock symbol

The IPO shares start trading on the listing day in two stages:

Following listing, the company will have to remain compliant with exchange rules. This involves filing:

• Notices of board meetings
• Annual reports
• Shareholding pattern samples
• Audit reports
• Corporate governance disclosures

These reports provide regular transparency to shareholders and regulators.

Although the entire IPO process is similar for both Mainboard and SME IPOs, there are some significant differences that separate the two:

The IPO process in India may take anything from three months to one year. The duration may vary based on various factors like the IPO type (Mainboard or SME), business complexity, size of the company, and prevailing market conditions.