As an entrepreneur, you’re always looking for ways to take your business to the next level. But what if the next big step involves tapping into a much larger pool of capital to fund your growth? That’s where an IPO (Initial Public Offering), comes in. It’s a term that many entrepreneurs and investors have heard of, but few fully understand. In this blog, we will understand what is IPO, types of IPOs, and most importantly, how it works for your business. By the end of this blog, you’ll have a clear understanding of how an IPO can potentially help your business expand and how you can prepare for it. Let’s dive in!
What is an IPO? Types of IPO and How it Works?
An Initial Public Offering (IPO) is when a private limited company registered with the ROC in India offers its shares to the public for the first time. In simple terms, consider it as a business opening its doors to the public, allowing people to buy ownership of the company through shares. In this transaction, the business gets the funds it needs to expand, and the buyers (investors) get a stake in the company, hoping it will perform well and make a profit.
The company that conducts the IPO becomes listed on a stock exchange, such as the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) in India. Once listed, the company’s stock can be bought and sold freely by the public, giving it liquidity and visibility in the market.
Book Building IPO Vs Fixed Price IPO: Understanding Different Types of IPOs
Understanding the types of IPOs can help investors make informed choices when a company goes public. The two main types are:
Fixed Price IPO
In a Fixed Price IPO, the company and its underwriters predetermine a specific price at which the shares will be offered to the public. Investors know this price in advance and can decide to buy shares based on this fixed rate. The success of a Fixed-price IPO is measured by analyzing the demand for shares at the set price.
Example: If a company sets the IPO price at ₹100 per share, investors know exactly how much they’re paying per share.
Book Building IPO
In a Book Building IPO, the share price is set within a price range rather than a fixed amount. Investors place bids within this range, specifying the number of shares they’re willing to buy and the price they’re ready to pay. Based on the demand and bids received, the final price is set, commonly referred to as the “cut-off” price. This type of IPO is more flexible and allows the company to gauge investor demand.
Example: If the price range is set between ₹90 and ₹120, investors may bid at different points within this range, and the final price depends on demand.
How Does it Work for Your Business?
Let’s walk through the entire IPO process, step-by-step, with a simple example. Consider a hypothetical company, ABC Solutions, a startup in the tech industry that needs capital to expand. The founders decide to take the IPO route to raise funds.
Step 1: Appoint a Merchant Banker (IPO Lead Manager)
The first step for ABC Solutions is to hire an expert Merchant Banker with a proven track record (such as Gretex Corporate Services Limited) to manage the IPO. The Merchant Banker’s role is to guide the company through the IPO process, including assisting in determining the share price, and the amount to be raised, and handling all legal requirements.
Step 2: Regulatory Approvals and Documentation
Next, the Merchant Banker helps prepare documents for regulatory approval. In India, companies must file a Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI). This document provides details about the company’s financials, the IPO structure, and how the raised funds will be used. SEBI reviews these documents to protect investor interests and ensure transparency.
Step 3: Setting the Price Range or Fixed Price
Once the approval is in place, ABC Solutions and its Merchant Banker will decide on the IPO pricing model. Suppose they choose a book-building approach with a price range of ₹100-120 per share. Potential investors can then place bids within this range.
Step 4: Marketing the IPO
Promoting the IPO is a crucial step. Roadshows, media coverage, and advertisements help build interest among institutional investors and the general public. This marketing phase is essential to create a buzz and attract potential investors.
Step 5: Subscribing to the IPO
Now, investors can apply for shares by submitting bids during the subscription period. Institutional investors, retail investors, and qualified institutional buyers (QIBs) participate in this stage. If the demand for shares is high, the IPO may become oversubscribed, which means more bids are received than the number of available shares.
Step 6: Share Allotment
After the subscription period closes, the final price is set (if it’s a book-built IPO). The allotment process begins, where shares are distributed to successful applicants. Investors may receive fewer shares than they applied for if the IPO is oversubscribed.
Step 7: Listing on the Stock Exchange
Once shares are allotted, ABC Solutions is officially listed on the stock exchange, such as the NSE or BSE. The shares begin trading, and the public can buy or sell them on the open market. The listing day often sees fluctuations in the stock price as market demand and sentiment take over.
Is an IPO Right for Your Business?
In essence, an IPO is the bridge connecting private business aspirations with public investment opportunities, a tool that has powered many successful companies’ growth. By going public, a company opens itself to a broader investor base and gathers funds to fuel its expansion. While large corporations dominate IPO news, there is an increasing trend for small and medium-sized enterprises (SMEs) to explore IPOs, due to their innovative financial platforms and supportive policies.