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What is an Initial Public Offering?

13 May 2021 0 COMMENT

Of late, the term IPO has been a buzzword in the business world. From popular fast-food chains like Burger King to trending dating apps like Bumble, companies across the board have jumped on the IPO bandwagon in the last few years. Wondering what an IPO is all about? Read on to find out.

What is an IPO?

An initial public offering (IPO) is a process by which a privately owned company goes public. According to the Securities and Exchange Board of India (SEBI), "when an unlisted company makes either a fresh issue of shares or convertible securities or offers its existing shares or convertible securities for sale or both for the first time to the public, it is called an IPO."

A company no longer remains a private entity after an IPO as it paves the way for its listing and trading on the bourses. It joins other companies on the exchanges whose shares are also publicly traded. Essentially, there is a change in the nature of ownership of the company, from private to public.

Why go for an IPO?

One of the most common reasons why a company may choose to file for an IPO is to raise fresh capital. There may be other reasons behind an IPO, such as giving existing or early investors an exit route, facilitating mergers or gaining attention and wider credibility.

However, with a wider pool of investors come the regulatory requirements. Once public, a company must adhere to market regulations as outlined by SEBI and ensure public disclosure of their financial statements.

Overview of an IPO filing process

There are a number of steps to be completed before a company can sell its shares to the general public for the first time. The company or the issuer first appoints a merchant banker in an advisory capacity. Next, the merchant banker conducts due diligence by checking all documentation of the company and its financials. The merchant banker and the company together prepare a Draft Red Herring Prospectus (DRHP). This is a key document that is submitted to SEBI as well as filed with the exchanges and contains all mandatory disclosures and financial information about the company. Once approved, the document can be accessed by retail investors at a later stage, who can use it to evaluate the IPO with the help of all the details provided in the prospectus.

Then comes the stage where the facts and information disclosed by the company is verified by SEBI. On completion of the same, the company's application is cleared, and it is given a go-ahead to set a date for the IPO. The next step is the 'roadshow' or the marketing phase where the aim is to create chatter around the upcoming IPO. It is done ahead of the IPO in order to allow investors to get a better idea of what is on offer.

A key part of the IPO process is the pricing. This can be done in either one of two ways- fixed price IPO or book-binding offering. On conclusion of the bidding process and finalising of the IPO price, the company and the merchant banker decide upon the number of shares to be allotted to each investor. Thereafter, the shares get listed on the exchanges.

References:

https://www.sebi.gov.in/sebi_data/commondocs/subsection1_p.pdf

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