Financial capital is one of the most important components of a business. The need for financial capital grows with a growth in the business. At a certain stage, it becomes imperative to raise a large amount of financial capital to expand and sustain the business, and at an affordable cost to the company. An IPO – an acronym for Initial Public Offer – is one of the most popular methods of raising money from the general public and investors.
An initial public offer, as the name indicates, is the first (initial) instance of a company (called the issuer) offering its commons stock (or shares) to the general public for subscription.
It is a common misconception that only newly formed companies resort to raising money through an IPO. Even long established private companies can access the IPO route to raise capital, and become publicly traded companies as a result. An IPO is considered as a “rite of passage” into the big league of publicly traded stocks. Any company that needs to be listed on a stock exchange has to offer its shares to the public.
In addition to IPO, an already listed and publicly traded company may issue an FPO – a Follow on Public Offer – to raise further capital for the company. At any given time, there are a number of IPO and FPO issues floating around in the market, therefore, it is essential to understand the difference between the two.
Shares issued in an IPO are bought in the primary market, while shares brought from another investor are exchanged in the secondary market. The distinct between primary and secondary market is notional, there is no physical separation between the two. An important distinction between shares purchased during an IPO and shares purchased from the secondary market is that while in case of an IPO, the money goes directly into the company coffers; in case of secondary market, the money is transferred from one investor to another.
IPO Lifecycle Stages
The issuance of an IPO is a process with distinctive stages. the life cycle of an IPO can be understood to be spread over these steps or stages. The various stages in the life cycle of an Initial Public Offering are as follows -
- Initialization – In this stage, the company appoints various entities that are crucial in the management of the IPO. these entities include the issue managers or book runners (mostly investment banks) and registrars to the issue.
- Pre Issue Activities – In this stage, the draft offer prospectus is prepared and submitted to SEBI. The lead manager may conduct road shows- which are basically marketing activities- to generate awareness about the issue.
- Prospectus Review – SEBI reviews the prospectus submitted to it, and any changes and revisions suggested by SEBI are incorporated at this stage. Once the draft is approved by SEBI, it is termed as the Offer Prospectus.
- Submit Prospectus to Stock Exchange – The offer prospectus is now submitted to relevant stock exchange for approval. When the date of issue and the price band (and not the exact price) is decided and incorporated into the offer prospectus, it becomes the ‘Red Herring Prospectus’.
- Distribution of Red Herring Prospectus and IPO Forms – The prospectus and the forms are distributed to retail investors through the syndicate members.
- Public Issue – In this stage, the issue is thrown open to the public and the bids are collected. The public issue closes at a predetermined date. This stage can be considered to be the “public face” of the IPO.
- Price Fixing – Once all the bids are collected, the lead managers decide the final issue price, and inform the stock exchange and SEBI.
- Processing of IPO Applications by Registrar – This is the ‘clerical’ stage, wherein the forms are collected, checks are processed, share allotment is completed, shares are transferred to the demat accounts and any excess money is refunded.
- Listing in the Stock Exchange – Once the date of listing is decided, the shares of the issuer company are listed on the stock exchange.