India IPO Process

IPO Process in India: Steps, Regulations, and Key Considerations

The Initial Public Offering (IPO) process in India is a structured and regulated pathway for private companies to go public by issuing shares to investors. This process is governed by the Securities and Exchange Board of India (SEBI) and involves several key steps, regulatory approvals, and financial disclosures. In this blog, we will provide an in-depth understanding of the IPO process in India, covering its steps, regulations, and key considerations.

Recognizing the Importance of the Initial Public Offering Process

A private firm must follow the Securities and Exchange Board of India's (SEBI) IPO guidelines when it goes public. Keep in mind that coming public is a difficult and intricate procedure. Understanding the necessity of the IPO process and how it benefits investors and firms alike is crucial before an investor puts money into an IPO.

Some of the main factors for a firm to go public through an IPO are listed below:

Acquiring Funds: A company's primary goal when launching an IPO is to raise money. As previously said, a business might use an IPO to expand, innovate, accelerate growth, and pay off existing debt. It gives the business the money it needs without increasing its debt.
Access to Capital Market: A company can access a wider variety of capital market financing options by conducting an initial public offering (IPO). It may issue further bonds, shares, debt instruments, or raise money from other sources to fund future expansion.
Increased Brand Visibility: The company's name gains credibility when it is listed for an IPO. Businesses can obtain fresh capital contributions through an initial public offering (IPO), which increases their visibility and draws in superior talent and strategic partnerships.

Increased Liquidity: An initial public offering (IPO) gives a company the chance to raise money from the general public while simultaneously giving its current shareholders the chance to sell their shares. A private corporation has less liquidity since it is more difficult to buy and sell its shares. Existing shareholders can trade and reduce their investments when the company's shares are listed on a stock exchange.

Steps to Launch an IPO in India

The process of launching an IPO in India involves multiple stages, from company evaluation to listing on the stock exchange.

1. Employing an Investment Bank or Underwriter:

Once a business has made the decision to go public, the first stage in the IPO process is to enlist the assistance of financial professionals known as underwriters. From the initial due diligence to post-listing support, these underwriters—typically investment banks—manage the initial public offering (IPO) process on behalf of the issuing firm.

From beginning to end, all parties concerned coordinate with one another. These underwriters draft and sign the underwriting agreement, which contains all the pertinent information about the securities being issued, the deal's specifics, and the amount to be raised in the initial public offering.

2. Decision to Go Public

A company first decides whether it wants to raise capital through an IPO. The management evaluates factors such as business growth, financial health, and market conditions before proceeding.

Important criteria’s to be considered Before Going Public:

Business Growth & Expansion Needs: If the company requires substantial capital to expand its operations, invest in technology, or enter new markets, an IPO can be a viable funding option.
Financial Health: The company must have a strong balance sheet, consistent revenue growth, and profitability to attract investors.
Market Conditions & Investor Sentiment: Timing plays a crucial role in the success of an IPO. Favorable market conditions and positive investor sentiment can result in a well-subscribed IPO with higher valuations.

Regulatory & Compliance Readiness: A company must comply with SEBI guidelines and other regulatory requirements before initiating an IPO.

Alternative Funding Options: The company also evaluates other fundraising options like venture capital, private equity, or debt financing before deciding on an IPO.

Once the management is confident that an IPO is the best route, they start preparing for the next steps by engaging financial and legal advisors.

3. Appointment of Key Advisors:

Companies appoint professionals to assist in the IPO process, including:

Investment bankers (Lead Managers): Help with valuation, underwriting, and book-building.
Legal advisors: Ensure compliance with SEBI regulations.
Auditors: Provide financial transparency and conduct due diligence.

Registrars & Transfer Agents (RTA): Manage the allotment process.

4. Due Diligence

A comprehensive examination of the company's financial records, legal and regulatory compliance, corporate governance procedures, and possible hazards are all part of the due diligence process. This stage makes sure that potential investors are properly informed of all important IPO-related information. The company hopes to give prospective stakeholders a clear and accurate picture of the IPO by carrying out this thorough assessment, empowering them to make knowledgeable investment choices.

5. Preparation of Draft Red Herring Prospectus (DRHP)

The Draft Red Herring Prospectus (DRHP) is a document that contains financial details, business risks, and objectives of the IPO. It is submitted to SEBI for approval.

Once the company decides to go public, it must prepare the Draft Red Herring Prospectus (DRHP)—a crucial document that provides detailed financial and operational information to potential investors and regulatory authorities.

Key Components of DRHP:

Company Overview: Business model, key products/services, revenue sources, competitive advantages, and management structure.
Financial Statements: Profit & loss statements, balance sheets, and cash flow statements for at least three years.
Risk Factors: Identification of risks such as market competition, regulatory changes, economic downturns, and operational challenges.

Use of IPO Proceeds: A detailed plan on how the funds raised will be utilized—expansion, debt repayment, acquisitions, or working capital.

Industry & Market Analysis: A comprehensive analysis of the company’s sector, market size, growth trends, and competitors.

Legal & Regulatory Disclosures: Any ongoing litigation, regulatory compliance status, and corporate governance policies.

The DRHP is drafted with the help of investment bankers, legal advisors, and auditors, ensuring all necessary disclosures are made. Once finalized, it is submitted to SEBI for review and approval.

6. SEBI Review and Approval

SEBI reviews the DRHP and may ask for modifications or clarifications before granting approval.

After the DRHP is submitted, the Securities and Exchange Board of India (SEBI) thoroughly reviews it to ensure compliance with regulatory norms and investor protection measures. Its review process are:

Document Scrutiny: SEBI examines financial statements, risk disclosures, and regulatory compliance to ensure transparency.
Queries & Clarifications: If SEBI finds inconsistencies or requires additional details, it sends queries to the company, which must provide satisfactory responses.
Approval or Modifications: SEBI either approves the DRHP or asks for modifications. The company must make necessary changes before resubmitting.

Public Feedback: The DRHP is made public, allowing investors and analysts to review the document and raise concerns if needed.

Once SEBI grants approval, the company moves to the next stage—securing approval from stock exchanges for listing.

7. Stock Exchange Application

The company applies to stock exchanges like NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) for listing approval.

After SEBI approves the IPO, the company applies for listing on one or more stock exchanges in India, such as:

National Stock Exchange (NSE)
Bombay Stock Exchange (BSE)

Stock Exchange Listing Requirements:

Minimum Net Worth & Profitability: The company must meet the minimum financial eligibility criteria set by NSE and BSE.
Minimum Public Shareholding: At least 25% of post-IPO shares must be offered to the public (for mainboard IPOs).
Application to Stock Exchanges: The company submits the required documents, including the approved DRHP, financial reports, and compliance certificates.

Stock Exchange Due Diligence:The exchange conducts due diligence to verify the company’s compliance with listing norms.

In-Principle Approval: If all requirements are met, the stock exchange grants in-principle approval for listing.

Once the stock exchange approves the listing, the company moves forward with IPO marketing and promotion.

8. Roadshows and Marketing (Pre-IPO Promotion)

The company, along with investment bankers, conducts roadshows and investor presentations to attract institutional and retail investors.

Before launching the IPO, the company and its investment bankers conduct an extensive marketing campaign to attract potential investors. This phase is crucial for generating demand for the IPO.

Key Pre-IPO Marketing Activities:

Investor Roadshows: The company’s leadership and investment bankers travel to different cities and countries to meet with institutional investors, mutual funds, and high-net-worth individuals (HNIs).

Analyst Meetings & Presentations: Financial analysts and media houses are briefed about the company’s financial health, growth strategy, and investment potential.

Retail Investor Awareness Campaigns: Public advertisements, TV interviews, and digital campaigns educate retail investors about the IPO.

Price Band Finalization: Based on market demand and investor feedback, the company finalizes the IPO price band.

Publishing the Red Herring Prospectus (RHP): The final prospectus with the issue price, size, and subscription dates is published for public reference.

A successful roadshow increases investor confidence, ensuring higher IPO subscriptions. Once marketing is complete, the IPO is opened for public subscription.

9. Price Band and Book-Building Process

The company, in consultation with investment bankers, sets a price band for the IPO.
The book-building process helps determine the final issue price based on investor demand.

10. IPO Subscription Period

Investors can apply for shares during the IPO subscription window through ASBA (Application Supported by Blocked Amount).

11. Share Allotment and Listing

Shares are allotted based on demand and subscription levels.
The company debuts on the stock exchange, and trading begins.