There comes a time when most companies think about transitioning from private to public. One of the prime reasons to do so is to raise capital. And that’s what the concept of an IPO is all about.
IPO or Initial Public Offering is when a privately held company transitions to a publicly traded entity by exchanging securities or shares/stocks for funds. To become a publicly traded entity, the companies must go through a well-defined process by National Stock Exchange and Bombay Stock Exchange.
How Does IPO Work in India?
The National Stock Exchange and Bombay Stock Exchange have prescribed a process that companies must follow. The following is a brief overview of the same –
A firm sells its equity to one or more investment banks that will act as underwriters for the IPO. These stocks are offered for sale to the general public by the underwriters. As they risk purchasing stocks at a lower price and ensuring that they sell for a lot more money than they paid, underwriters charge a fee for their services. It is the primary justification for why bull markets are usually preferred for IPO launches.
Furthermore, the underwriter is responsible for drafting several documents like the Engagement Letter, Letter of Intent, Underwriting Agreement, Registration Statement, and Red Herring Document.
All the details disclosed by the issuing company are then verified by the SEBI (Securities and Exchange Board of India which is responsible for overseeing capital markets in India).
The effective date is established upon the SEBI’s approval of the IPO. The issuing business and the underwriter choose the offer price and the specific quantity of shares to be offered the day before the effective date. Deciding on the offer price is crucial since it determines the price at which the issuing firm will obtain funds.
Once the IPO is launched, the shares are available in the primary market for 3-7 days. The maximum you can keep an IPO open is for 10 days. After this, the share allotment takes place. The registrar ensures that shares are credited to each successful applicant’s Demat account.
The IPO process concludes with the firm being listed on a stock market. Successful applicants can trade their shares after being listed in the secondary market, and new investors can buy those shares. However, lock-in periods apply to some shareholders, such as anchor investors and promoters, meaning they cannot promptly sell their holdings after the company is listed.
How to Select the Right IPO for Investment?
Selecting which IPO to invest in is not that difficult. All you need to do is conduct market research and study the company in detail. Read through the prospectus and all the information available in the public domain about the company and the underwriter.
The current IPO market is flourishing and how. India has seen some of its most loved and preferred companies go public, including Zomato, LIC, and Nykaa. However, before you apply for an IPO, conduct your research thoroughly and then take your call!