October 19, 2023
6 mins read
The IPO cycle refers to the stages a company follows when it offers shares to the public for the first time. The process includes preparation, regulatory approval, pricing, subscription, allotment, and stock exchange listing. Each stage follows market rules. Understanding the IPO cycle helps you see how companies raise funds and enter the public market.
An IPO cycle describes the full process a company follows when it offers shares to the public for the first time. It begins with preparation, where the company reviews its finances, business structure, and regulatory requirements.
After this stage, the company files documents with the market regulator and seeks approval to launch the public issue. Once approved, the company works with advisers to decide the price range and open the share offer for investors.
During the subscription period, investors apply for shares through the stock market system. After the offer closes, shares are allotted and the company lists on the stock exchange. Understanding the IPO cycle helps you learn how companies raise capital and become publicly traded entities.
An IPO cycle is the full process a company follows when it offers its shares to the public for the first time. This process helps the company raise capital from investors through the stock market.
The cycle usually begins with preparation. The company reviews its financial records, business plans, and compliance requirements. It also works with advisers such as investment banks and legal experts to organise the public offering.
After preparation, the company files documents with the market regulator and seeks approval. Once approved, the company announces the share offer and sets a price range for investors.
The process continues with investor subscription, share allotment, and stock exchange listing. When the shares start trading in the market, the IPO cycle reaches its final stage.
Additional Read: What is IPO: Full Form, Meaning & How it Works
The points below will take you through the different stages of an IPO cycle.
As mentioned above, the IPO cycle begins when an IPO-issuing company hires a team of investment bankers as its underwriters. This team conducts a thorough market analysis and research to study the company’s functioning. It also looks into financial metrics like total income, assets and liabilities. These parameters help underwriters judge the market sentiment for an upcoming IPO.
The company and its underwriters will sign an underwriter’s agreement which carries all terms and conditions of their deal. The underwriters can intervene whenever the prices of IPO shares show signs of falling. According to a typical underwriter’s agreement, an essential role of underwriters is to maintain stability in share prices after an IPO.
After a thorough research about the company, underwriters work with it to design its draft prospectus. This document carries all important information related to their research about the company. It includes details like the company’s proposition to launch an IPO, details of its offer and objectives for utilising the net proceeds.
Furthermore, this preliminary document carries comprehensive information about this company. Such as its history, strengths, strategies, risks, finances, legal bindings and promoter information. These details will further help investors decide whether to invest in this company’s IPO or not.
After compiling the entire DRHP, the IPO issuing company submits it to SEBI for approval. SEBI scrutinises this document thoroughly and verifies the given information and if the company qualifies for listing.
If required, SEBI can resend the DRHP back to the company and suggest certain amendments. It must get done with these changes and resubmit its DRHP to SEBI for approval.
After SEBI provides its approval through an observation letter, the company can move on to the next step to plan its IPO launch.
Once the company makes the final decision to launch its IPO, the next step in the IPO cycle is creating buzz among retail investors. To achieve this goal, a company can choose to host roadshows to notify interested investors about its upcoming public issue.
Companies also publish news about their IPO plans in several English and regional language newspapers and visit commercial hubs. Such marketing tools help companies attract the interest of investors and create awareness of their upcoming IPOs.
As a company moves ahead with launching its IPO, it will set a tentative price band in its Red Herring Prospectus. This price band is set by underwriters depending on the face value of shares and the company’s valuation. It is also important to note that the company will set its final price band after receiving necessary approvals from SEBI.
Afterwards, the company will decide upon the issue price and other important details like minimum lot size. A company can also choose to declare its issue price after the subscription of shares. In a book-building issue, a company decides its issue price after the IPO window closes.
Once a company sets its IPO price range and lot size, it announces the date for IPO launch. You will find this information in the Red Herring Prospectus which companies publish for interested investors for detailed knowledge.
The companies provide a two to three-day window as bidding dates that start from the IPO launch day and end with the closing date. During this window, interested individuals can participate and bid for the desired amount of shares. As an investor, you can choose between online or offline modes to participate in the bidding process.
After the IPO subscription window closes, the next step in the IPO cycle is allotment of shares. In this, management and underwriters review investors’ applications and select eligible bids. These bidders will receive their desired shares in their Demat account. The remaining bidders will get their bidding amount as refunds after successful asset allocation.
This is the final stage in the IPO cycle. After investors have received IPO shares in their Demat accounts, the company will list these shares in respective stock exchanges. Now, these shares are available to every investor to trade or hold as per their choice.
Also Read: DRHP and RHP
Additional Read: How to Invest in an IPO
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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SEBI regulates and monitors IPO processes in India. Companies that are planning to launch their IPOs must follow all rules and guidelines set by SEBI.
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Companies price their IPOs following two main methods. These are book-building methods and fixed-price methods.
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Corporations which are planning to raise money by selling bonds must submit a Shelf Prospectus to SEBI. This document is similar to the Red Herring Prospectus and carries all necessary information on securities, their prices and launching date.
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An elaborate IPO process involves large-scale expenses for a company going public for hiring underwriters and marketing IPOs. It is also a time-consuming process that involves several non-monetary costs.
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This article is for educational purposes only and should not be considered investment advice. Market investments are subject to risks. DSIJ Wealth Advisory Private Limited is a SEBI-registered Research Analyst (Reg. No: INH000006396) and Investment Adviser (Reg. No: INA000001142). Please consult your financial adviser before investing.
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