What does it mean ?
Initial Public Offering is the process by which private organisations offer shares to the public in a new stock issuance. The purpose is to raise capital from the public. In simple terms, when the promoters of a company intend to share its ownership with the public for raising capital, IPO is what they go for.
Steps to list your company on the stock exchange
Step 1: Company hires an investment bank or multiple banks who help them in the listing process. The process includes detailed assessment of assets and liabilities followed by a plan to cater to the financial needs. The output will be an underwriting agreement containing the details of the amount that is to be raised and the securities that are to be issued.
Step 2: Company and the underwriters will register with the Securities and Exchange Commission (SEC). The registration statement must contain fiscal data and business plans of the company along with details of how the company is going to utilize the funds. The decision lies with SEC based on how transparent the company is to its potential investors. If rejected, the company needs to re-register again after rectifying the gaps.
Step 3: Documenting Red Herring is the next step of the IPO process. This primarily contains the probable quote of the price of each share along with other details about the IPO. This is an initial prospectus and hence is termed as red herring due to the uncertainty of information it contains.
Step 4: Marketing the IPO is a key step before the company is formally listed on the stock market. In this step, the executives of the organisation spread the word on different forums about the upcoming IPO and the strategic goals that the company wishes to achieve by raising these funds. This helps in gaining confidence of potential investors, mostly QIB (Qualified Institutional buyers). This step helps in spreading a positive word.
Step 5: Pricing of IPO is the next and the most critical step. There are primarily three things that are decided as part of this step:
Is the issue price going to fixed or floating ? - This helps in finalising the price band or a fixed price.
How many shares are to be sold ? - Based on the price, number of shares are determined.
On which stock exchange is the company planning to list its shares ? BSE/NSE
Once done, SEC needs to announce the registration statement as effectual for the investors to start purchasing.
Step 6: Making the shares available to public is the time when retail investors start investing both in online/offline mode. SEBI usually provides a period of 5 working days for the investors to purchase shares.
Step 7: Company gets listed on the stock exchange after all these steps. The underwriters and stakeholders decide the number of shares every investor receives, which is usually full unless its is over-subscribed. There are refunds in cases the shares cannot be allocated. Once done, the company gets listed on the stock exchange.
IPO is considered as one the most profitable techniques of making money for any investor. A timely purchase can change your fortunes.
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