The IPO cycle, or Initial Public Offering Cycle, signifies a crucial phase in a company’s growth journey, transitioning from a privately held entity to a publicly traded company.
This process helps companies become more well-known and trusted. It also lets them get more money to grow and develop even more.
IPO Cycle Overview:
The entire process of initiating an IPO is referred to as an IPO cycle. A company needs to take a number of steps in order to raise capital from equity markets and get listed on stock exchanges.
Only after finishing the preceding step in the cycle can a company proceed to the next one.
Also Read : What is Lot Size and Minimum Order Quantity (MOQ) in IPO?
A Detailed Walkthrough of the IPO Cycle:
Understanding the IPO cycle requires understanding its distinct stages, each contributing to the company’s evolution into a publicly traded entity.
1. Pre-IPO Phase:
The Pre-IPO phase is the initial step in a company’s journey to becoming publicly traded. It involves assessing the company’s finances, determining its value, and selecting underwriters.
The company must comply with regulations, engaging in activities like presentations and roadshows to attract potential investors. Challenges include financial transparency and regulatory adherence, demanding strategic decision-making.
Success requires thorough financial planning, effective communication, and regulatory readiness for a smooth transition to subsequent IPO stages. It sets the foundation for all Upcoming IPOs.
2. IPO Phase:
The IPO phase is a critical stage in a company’s shift from private to public ownership. It involves filing a registration statement with regulatory authorities, detailing the company’s financials and operations.
Managed by underwriters, the IPO transaction sets the share price, allowing investors to place orders. Post-IPO, the underwriter sells remaining shares, and stock prices become volatile. India, as a member of IOSC, follows SEBI regulations.
The IPO process in India includes hiring an investment bank, preparing documents, roadshows, SEBI approval, setting a price band, share allotment, and listing.
Going public offers benefits like capital raising and increased visibility but entails costs and scrutiny. Consideration of pros and cons is crucial before making this transformative decision.
3. Book-Building or Marketing Phase:
In the Book-Building or Marketing Phase of an IPO, companies and underwriters work together to create interest among investors.
This involves marketing efforts to generate demand for the shares. The company, with the help of underwriters, presents the investment opportunity to potential buyers, collecting indications of interest or bids within a specific price range.
This phase plays a crucial role in determining the level of interest and demand for the IPO. It helps set the stage for the subsequent offering or subscription phase, where the final offering price is determined based on the demand generated during book-building
4. Offering or Subscription Phase:
The Offering or Subscription Phase is a significant step in the IPO cycle. After generating interest in the Book-Building phase, the final offering price is determined during the Offering Phase. Investors who were allocated shares in the book-building process can now purchase them at the set price.
The company receives proceeds from these share sales, which can be used for various purposes like debt repayment or business expansion.
This phase marks the completion of the IPO process, providing the company with increased visibility, access to a broader investor base, and potential opportunities for growth.
5. Post-IPO Phase:
The Post-IPO Phase follows the public offering, where a company’s shares are listed on the stock exchange, and trading begins.
This phase introduces a new dynamic as the stock price fluctuates based on market demand. The company gains access to a larger investor base, enhancing liquidity. Simultaneously, the underwriters sell off remaining shares.
Despite increased scrutiny, this phase offers opportunities for acquisitions and growth. Post-IPO, investors can freely buy and sell shares, contributing to the company’s ongoing journey in the publicly traded market
Key Steps in the IPO Cycle in India:
In the Indian IPO cycle, below are the key steps which a privately held company takes to become publicly traded company:
1. Registration by SEBI:
In the Registration by SEBI stage, a company seeking to go public in India submits an application to SEBI. After SEBI review and approval, the company proceeds to prepare a detailed prospectus, a crucial step in initiating the IPO process, ensuring regulatory compliance.
2. Preparation of a Draft Prospectus:
During this step, a detailed prospectus is crafted, serving as a comprehensive document that outlines the company’s operations, financials, and risks. This prospectus becomes a crucial tool for potential investors to make informed decisions.
3. Roadshows:
Roadshows involve company executives traveling to different cities, meeting potential investors, and presenting the upcoming IPO opportunity.
Through these presentations, executives aim to generate interest, showcase the investment potential, and answer questions, contributing to a successful IPO by attracting investor support.
4. Approval by SEBI:
Approval by SEBI is a crucial step in the IPO process. SEBI carefully reviews the submitted prospectus, ensuring all necessary information is accurate and disclosed.
This regulatory approval is essential for the company to proceed with the IPO, providing investor confidence in compliance and transparency.
5. Price Band:
The Price Band in an IPO is the specified range within which investors can bid for shares. It’s a crucial decision, determining the pricing boundaries for the offering. This transparent mechanism aids fair pricing and enables investors to make informed bidding decisions during the IPO process.
Also, some investors watch IPO Grey Market Premium (GMP) closely which will help in understanding demand for the issue.
6. Share Allotment:
IPO Share Allotment is the process where, after the IPO bidding period, the company, along with underwriters, evaluates bids. Based on demand, shares are allocated to investors. This step ensures a fair distribution of shares among investors who participated in the offering.
7. Listing:
Listing is when a company’s shares become officially tradable on a stock exchange after the IPO. It marks the start of secondary market trading, allowing shareholders to buy and sell shares openly, enhancing market liquidity and providing investment opportunities.
8. Bidding:
Bidding in an IPO is where investors place orders for shares within a specified price range. It’s a crucial step allowing both retail and institutional investors to express interest, contributing to the overall demand dynamics and determining the final share allocation during the offering.
Benefits of the IPO Cycle:
- Capital Raising: IPOs enable companies to raise substantial funds by selling shares to the public, supporting business expansion, research, and development.
- Increased Visibility: Going public enhances a company’s visibility, attracting new customers, partners, and stakeholders.
- Liquidity for Shareholders: IPOs provide liquidity as shareholders can freely buy and sell shares on the open market.
Drawbacks of the IPO Cycle:
- Costs: Companies incur significant expenses related to listing and ongoing compliance, affecting overall profitability.
- Increased Scrutiny: Publicly listed companies face heightened scrutiny, necessitating additional staff and resources.
- Time Commitment: The IPO process is time-consuming, demanding considerable dedication from company executives.
Also Read : Is PAN Card Mandatory to Apply for and IPO?
Conclusion:
In summary, the IPO cycle is the process that allows companies to become publicly traded, though it can be complex.
While going public offers benefits like raising funds and gaining visibility, it’s crucial to weigh the pros and cons. An IPO can be expensive and time-consuming, and there’s pressure for the company to perform well.
It’s a significant decision, so consulting with experts is essential before deciding if it’s the right move for your business.
Frequently Asked Questions about the IPO Life Cycle
Q1: What is the IPO Life Cycle?
Answer: The IPO Life Cycle, or Initial Public Offering Life Cycle, is the series of stages a company goes through when transitioning from private to public ownership by offering its shares to the general public.
Q2: What are the key stages in the IPO Life Cycle?
Answer: The key stages include Pre-IPO preparation, IPO filing and regulatory approval, marketing or Book-Building, share offering, post-IPO listing, and trading on the stock exchange.
Q3: Why do companies go through the IPO process?
Answer: Companies opt for IPOs to raise capital, increase visibility, create liquidity for shareholders, and gain access to a broader investor base in the public market.
Q4: What is the significance of the Pre-IPO Phase?
Answer: The Pre-IPO Phase involves preparing the company for going public by evaluating financials, determining valuation, and complying with regulations. It sets the groundwork for a successful IPO.
Q5: How is the share price determined in an IPO?
Answer: The share price is determined through the Book-Building or Marketing Phase, where the company and underwriters engage in efforts to generate interest and decide the final offering price based on demand.
Q6: What happens during the Offering or Subscription Phase?
Answer: In this IPO Subscription phase, the final offering price is set based on demand generated during Book-Building. Investors who were allocated shares can purchase them, and the company receives proceeds from the share sales.
Q7: What is the role of SEBI in the IPO process in India?
Answer: SEBI, the Securities and Exchange Board of India, reviews and approves IPO applications, ensuring compliance with regulatory standards and protecting the interests of investors.
Q8: What are the benefits of going public through an IPO?
Answer: Going public through an IPO provides companies with opportunities to raise capital, increase visibility, and create liquidity for shareholders, supporting business growth and development.
Q9: Are there drawbacks to going through an IPO?
Answer: Yes, drawbacks include costs associated with listing, increased scrutiny, and the time commitment. Additionally, there’s the risk that the stock price may not meet expectations.
Q10: How should a company decide if an IPO is right for them?
Answer: Companies should weigh the pros and cons, considering factors like growth, profitability, and the ability to handle increased scrutiny. Seeking expert advice before making a decision is crucial.
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