What is the process of an IPO?
Going Public is a big step for a private company, which means that the company can now have
access to a lot of money, giving it a better opportunity to grow and expand.
IPO process is complex and requires time, money, and substantial consulting. Lets look
at the steps:
Selecting an Investment bank: As step one, a company which wants its transformation to
a public goes to investment bankers, for advice on the transaction and to provide underwriting
services.
Investment banks evaluate the prospects of a business and its past performance. They
also look carefully at the business model, industry, and products of the company.
Companies often select banks that have been engaged with the business in the past because
these banks know in and out of the company.
Regulatory filings: Markets regulators regulate public markets across most of the jurisdictions.
Since public markets come in the ambit of market regulators, IPOs are also monitored
and evaluated by the regulators.
This process includes completing the underwriting agreement with the investment bank. Underwriter
effectively acts as a broker between public market investors and the company. The investment
bank or group of investment banks decide their underwriting capacity.
In this stage, the company also provides necessary information and disclosure to the stock exchange
and market regulator. It registers the prospectus prepared by an investment bank. Once the prospectus
is registered, it is accessed by investors who are willing to invest in the upcoming
IPO.
Pricing of the IPO: After the necessary fillings and approvals, the investment banks that are
handling the transaction undertake pricing of the company. The offer price of an IPO
is based on valuation, market factors, and business performance.
IPOs are priced in two ways. In a fixed price offer, the offer price of the shares is fixed
by the investment bank based on the valuation; this process is usually applied when a small
company is going public.
In the book-building process, the investors submit their bids to the investment banks
promoting the IPO transaction. This process is used for a large enterprise to obtain a
maximum issue price for the stock based on the investors’ expectations. Once investment
bankers receive bids, they evaluate the bids provided by investors and arrive at an issue
price for the company’s share.
Offer period: After the pricing of the IPO is completed, the offer period commences,
which is given in the prospectus. During the offer period, the public market investors
subscribe to the IPO of the company.
This period usually decides whether the IPO is ready to hit the market or not. A company
should achieve a minimum subscription to make debut in the markets.
Allotment of shares: Once the offer period is closed, it is revealed whether the IPOs
was oversubscribed or undersubscribed. If the issue is undersubscribed, the investors
will receive the same number of shares subscribed by them. When shares are oversubscribed, the
underwriters have the option to raise the price, offer additional securities or consider
both.