The Process of an IPO in India

An initial public offering (IPO) is when a company sells its shares to the public for the first time. Before this, the company would have been privately owned. After an IPO, anyone can buy its shares on the stock market. In India, this process is looked after by SEBI (Securities and Exchange Board of India) to make sure all rules are followed.

Understanding the IPO process in India is crucial for both companies looking to raise funds and investors seeking opportunities in the stock market. In the myriad of steps involved, clarity and adherence to regulations are paramount to ensure a successful public offering.

What is the official process of an initial public offering?

The initial public offering process is a series of steps that a private company follows to offer its shares to the public for the first time. This allows the company to raise money from public investors, increase its visibility in the market, and give existing shareholders a chance to sell their shares.

The IPO (initial public offering) process in India is guided by a clear set of rules set by the SEBI, which aims to ensure that the process is transparent, protects investors, and maintains the integrity of the market.

The process of going public through an IPO is a significant milestone for any company, marking the transition from a privately held entity to a publicly traded one. This not only helps the company raise capital for expansion and growth but also increases its visibility and credibility in the market.

As companies prepare for an IPO, they undergo extensive preparations, including financial audits, regulatory compliance, and creating a robust marketing strategy to attract potential investors.

To successfully go public, companies need to meet certain eligibility requirements, prepare all necessary documents, and follow strict disclosure rules.

The IPO process

The IPO process steps can be broadly categorised into pre-issue and post-issue phases:

1. Preliminary decision and preparation

• Board approval: The company's board must formally approve the decision to go public, outlining the objectives, timing, and approximate size of the offering.
• Eligibility assessment: Companies must meet SEBI's criteria, including minimum net tangible assets of ₹3 crores in each of the preceding three years, average consolidated pre-tax operating profit of at least ₹15 crores during the three most profitable years from the immediately preceding five years, and a net worth of at least ₹1 crore in each of the preceding three years.
• Selection of lead manager: Appointing an experienced merchant banker is crucial, as they will coordinate the entire IPO procedure. They will conduct due diligence, prepare documentation, and manage regulatory compliance.

2. Appointment of key intermediaries

• Registrar to the issue: Handles application processing, share allocation, and refund management.
• Legal advisors: Ensure compliance with legal requirements and assist in drafting offer documents.
• Underwriters: Guarantee subscription to shares if the issue is undersubscribed.
• Bankers to the issue: Collect application money and handle refunds for unsuccessful applicants.
• Auditors: Verify financial statements and provide necessary certifications.

3. Due diligence and documentation

• Business and financial due diligence: Comprehensive examination of the company's operations, financials, legal status, and risks.
• Draft red herring prospectus (DRHP): The first official document filed with SEBI containing details about the company, its operations, financials, risk factors, objects of the issue, and management.
• SEBI review: SEBI examines the DRHP and may request clarifications or changes before approval.

4. Marketing and pre-IPO activities

• Roadshows: Management presentations to potential institutional investors to generate interest.
• Anchor investors: Up to 60% of the portion reserved for qualified institutional buyers (QIBs) can be allocated to anchor investors a day before the issue opens.
• Price band determination: The company and lead managers decide on a price range for the shares based on valuation and market conditions.
• Red herring prospectus (RHP): Updated version of the DRHP with the price band, filed with the Registrar of Companies (ROC).

5. Issue opening and bidding

• Applications supported by blocked amount (ASBA): All investors must apply through the ASBA facility, where the bid amount is blocked in their bank accounts rather than transferred.
• Investor categories: The issue is divided among QIBs, non-institutional investors (NIIs), and retail individual investors (RIIs) with specific allocation percentages.
• Bidding period: The issue typically remains open for 3-10 working days, with provisions for extension under certain circumstances.
• Book building vs fixed price: Most IPOs follow the book-building method, where investors bid within a price band, while some smaller issues may use a fixed-price approach.

6. Post-issue activities

• Bid evaluation and price determination: After the bidding period closes, bids are evaluated to determine the final issue price (cut-off price).
• Basis of allotment: Shares are allocated based on predetermined criteria for each investor category. If oversubscribed, proportionate allocation or lottery methods may be used.
• Refund processing: Funds are unblocked for unsuccessful applicants or excess application amounts.
• Allotment finalisation: Final allocation is completed and intimated to successful applicants.

7. Listing and trading

• Final prospectus: Filed with the ROC, containing the final issue price and subscription details.
• Listing approval: The company applies for and obtains listing approval from the stock exchanges.
• Trading commencement: Shares begin trading on the stock exchanges within three working days from the closure of the issue (T+3 timeline).

8. Post-listing obligations

• Compliance requirements: Listed companies must adhere to continuous disclosure norms, corporate governance standards, and other regulatory requirements.
• Greenshoe option: If included, this overallotment option allows underwriters to sell up to 15% additional shares to provide price stability.

For investors looking to participate in IPOs, having a Demat Account is essential. Axis Bank’s Depository Services offer a secure and efficient platform for managing investments in electronic form. It enables you to dematerialise physical share certificates, facilitating seamless trading and settlement processes.

IPO process timeline in India

The IPO process timeline in India evolved as financial markets developed:

• Pre-liberalisation era (before 1991): IPOs were tightly controlled by the government under the Capital Issues (Control) Act, 1947.
• Economic reforms in 1991: India liberalised its economy, leading to the need for a modern capital market.
• Formation of SEBI (1992): The Securities and Exchange Board of India (SEBI) was established to regulate the capital markets and protect investors.
• Introduction of book building (1999): SEBI allowed companies to price their IPOs through market demand via the book-building process, replacing fixed-price methods.
• Mandatory dematerialisation (2000s): To enhance security and efficiency, the process shifted from physical to digital shares, requiring investors to use Demat Accounts.
• Evolving norms (2010s onwards): With the growth of retail participation and fintech, SEBI introduced ASBA, faster listing timelines (T+3/T+2), and SME IPO platforms.

The evolution of the IPO process in India reflects the broader changes in the country's financial landscape. From the stringent controls of the pre-liberalisation era to the establishment of SEBI and the introduction of innovative mechanisms like book building and mandatory dematerialisation, each step has contributed to a more robust and investor-friendly capital market.

The adaptations made in recent years, such as ASBA and accelerated listing timelines, highlight the ongoing commitment to enhance accessibility and efficiency in the IPO process, catering to the growing participation of retail investors and the technological advancements in the financial sector.

Conclusion

The process of IPO in India represents a significant milestone for growing companies seeking to access public capital markets. While complex and time-consuming, a well-executed IPO can provide substantial benefits.

Understanding the IPO procedure steps and regulatory requirements is essential for companies considering this strategic move, as well as for investors looking to participate in new offerings.

FAQs

How long does the IPO process take?

The complete IPO process in India typically takes between 3 and 6 months from initial preparation to listing. This timeline includes approximately 2 to 3 months for pre-issue preparations, 30 to 45 days for SEBI review, 2 to 3 weeks for marketing, 3 to 10 days for the bidding period, and up to 6 working days for post-issue activities before listing.

What are the IPO rules?

IPO rules in India are primarily governed by SEBI's issue of capital and disclosure requirements (ICDR) regulations. These rules specify eligibility criteria, disclosure requirements, issue sizes, promoter contributions, lock-in periods, pricing guidelines, allocation percentages for different investor categories, and post-listing compliance obligations for companies undertaking the IPO process.

What is the IPO process?

The IPO process in India primarily follows two approaches: book building and fixed price. In the book-building method, investors place bids within a price band, and the final issue price is decided based on overall demand. This approach enables price discovery through market forces. The fixed-price method, less common for larger issues, involves setting a predetermined share price without any bidding process.