Initial Public Offering (IPO)

The term IPO stands for Initial Public Offer and it is in practice
in the primary market of shares and stocks.
It is the first issue of shares of a company to the public. An
Initial Public Offering (IPO) is the first sale of stock by a private
company to the public. IPOs are often issued by smaller,
younger companies seeking capital to expand, but can also be
done by large privately-owned companies looking to become
publicly traded.
IPOs can be a risky investment. For the individual investor, it is
tough to predict what the stock will do on its initial day of
trading and in the near future since there is often little historical
data with which to analyze the company. Also, most IPOs are of
companies going through a transitory growth period, and they
are therefore subject to additional uncertainty regarding their
future value.

In short we can say that IPO is the medium through which a

company raises equity capital from the public. By this process it
also gets listed on the stock exchange
Who decides the IPO Price?

Company with the help of lead managers decides the price or

price band of an IPO. Merchant bankers or syndicate members
are acting as the lead managers of companies.

Registrars to the Issue

Registrar plays an important role in an IPO process. Their main

job involves processing of IPO applications, allocation of shares
to the applicants on the guidelines provided by SEBI, processing
refunds and also allocating shares in the account of the
applicants.

Lead managers in an IPO

Lead managers are the independent financial institutions
which are appointed by the companies generally
involving big IPO’s. Their main responsibility is to
initiate the IPO process, help the company in road
shows, creating draft offer document and also getting the
same approved by the SEBI and Stock exchanges and
also helping the company in getting its shares listed on
the stock exchanges.

Life cycle of IPO Prospectus

There are three stages in the life cycle of an IPO Prospectus such
as;
• Draft offer document
• Offer document
 • Red Herring prospectus
Stage 1:- Draft offer document
Issuing company and the Book building lead managers prepare
the draft offer document which is submitted to SEBI for the
review. Now the SEBI may ask the lead managers to either
make any changes if required or approve it.

Stage 2:- Offer document

Once the Draft offer document gets cleared by SEBI it becomes
offer document, offer document is a modified version of Draft
offer document after SEBI’s suggestion

Stage 3:- Red Herring prospectus

Once the offer document gets clearance from SEBI the issuing
company adds number of shares and the price on the document
which is then offered to the public. The issue prospectus is now
called the red herring prospectus.

Life cycle of an IPO

There are eight major steps in the life cycle of an IPO such as;
• IPO process initialization
• Pre Issue Role - Part 1
• Prospectus Review
• Pre Issue Role - Part 2
• Bidding for the public issue
• Price Fixing
 • Processing IPO Applications
• Stock Listing
IPO process initialization - Issuing Company
Lead managers are appointed as book runners
Registrar to the issue are appointed
Syndicate members are appointed

Pre Issue Role - Part 1 - Lead Manager's

Draft offer prospectus document for IPO is prepared
Filing of draft offer prospectus with SEBI.
Road shows are conducted

Prospectus Review - SEBI

Reviewing draft offer prospectus by SEBI
If any changes are required in the document it is sent back
The draft offer prospectus becomes Offer Prospectus after the
approval of SEBI

Pre Issue Role - Part 2 - Lead Manager

Submitting the offer documents to SEBI
Decision on the issue date & issue price band is taken
Offer Prospectus modification with respect to date and price
band if any. Document is now called Red Herring Prospectus.
Printing and distribution of red herring prospectus and IPO
document to syndicate members

Bidding for the public issue - Investor

Public Issue Open for investors bidding.
Filling of application form by the investor
Providing bidding information to BSE/NSE
Sending the cheques collected to the registrar by syndicate
members
Revision of bid by investor if any
Updating stock exchanges with latest data
Closing of public issue

Price Fixing - Lead Manager

Lead managers evaluate the final issue price.
Red Herring Prospectus is updated with the final issue price and
sent to SEBI and Stock Exchanges

Processing IPO Applications - Registrar

All cheques and application forms are received by registrar
Applicant data is feeded into systems
Cheques are sent for clearance.
Looking out for all bogus application
Finalizing the pattern for share allotment
Preparing 'Basis of Allotment'
Transferring shares in the demat account of investors.
Refunding the remaining money though ECS or Cheques

Stock Listing - Lead manager

After the completion of all the above process lead managers
decide the listing date with stock exchanges
Final listing of share on the exchange
Basic concepts attached with IPO
• Fixed issue price
• Book building issue
• Floor price
• Cut off price
Fixed issue price
Price at which the securities are offered/ allotted is known in
advance to the investor

Book building issue

Price at which securities will be offered/ allotted is not known in
advance to the investor. Only an indicative price range is known

Floor price
Floor Price is the minimum price (lower level) at which bids can
be made for an IPO.

Cut off price

Cut off price refers to the price which is decided by the issuer
i.e. the price at which the issuer decides to make the allotment
and it indicates that the applicant is ready to accept the price
decided by the issuer if he/she mentions cut off prices on the
share application form.