Initial Public Offerings (IPOs): Process of Taking a Company Public

They say, “strike while the iron is hot,” and that couldn’t be truer when it comes to Initial Public Offerings (IPOs). Companies often wait for the perfect moment to “go public,” seizing favourable market conditions to launch their stock on an exchange. IPOs are one of the most significant events in the lifecycle of a company, allowing private firms to raise capital by selling shares to the public. Bus this is not as simple as wit seems to be. From legal preparations to regulatory approvals and roadshows, the journey to an IPO is a complex one. Let’s explore how a company transforms from private to public, the steps involved, and the scenario of IPOs in India, a country that has seen a surge in public listings.

What is an IPO?

An Initial Public Offering (IPO) is the process by which a private company sells its shares to the public for the first time, marking its transition into a publicly traded entity. By issuing shares, a company raises funds from the general public, allowing it to fuel growth, invest in new projects, or pay off existing debts. In exchange, shareholders gain ownership in the company and can potentially benefit from its future success.

Why Go Public?

Before diving into the mechanics of an IPO, it’s essential to understand why companies opt for this route. The primary reasons include:

• Capital Generation: An IPO is a lucrative way to raise substantial capital for expansion, acquisitions, or research and development.
• Increased Visibility: Being a publicly traded company enhances credibility, visibility, and media attention, boosting the company’s profile.

• Shareholder Liquidity: On going public, current investors, founders, and staff members can cash out a portion of their shares, hence generating liquidity.

 

• Currency for Acquisitions: Publicly traded shares can be used as currency for future mergers and acquisitions.

The IPO Process: From Private to Public

1. Decision to Go Public

• The first step in an IPO is a decision by the company’s leadership and board of directors to go public. This decision is often driven by the need to raise capital for expansion, repay debts, or give early investors and employees the opportunity to liquidate their holdings.

2. Selection of Underwriters

• Underwriting is crucial to the success of an IPO. The company hires an investment bank or a consortium of banks to act as underwriters. These underwriters help determine the price of the shares, the total number of shares to be sold, and the ideal timing for the IPO. They buy the company’s shares in exchange and resell them to investors.

 

3. Due Diligence and Regulatory Filings

Before the IPO, the company undergoes rigorous due diligence. Financial statements are audited, and every aspect of the company is scrutinized. Legal teams work to ensure compliance with regulatory bodies, such as the Securities and Exchange Commission (SEC) in the U.S. or the Securities and Exchange Board of India (SEBI). In India, a company must file a Draft Red Herring Prospectus (DRHP) with SEBI, which contains details about the business, risks, financials, and plans for the use of IPO proceeds.

4. Marketing and Roadshows

One of the most critical phases of the IPO process is the marketing or “roadshow.” This is where company executives, along with underwriters, meet potential investors, such as institutional investors, hedge funds, and wealthy individuals, to pitch the company’s future prospects. The roadshow is an opportunity for the company to build demand for its shares, which ultimately helps determine the offering price.

5. Pricing and Allocation

Once investor interest is gauged, the company, along with its underwriters, sets the final offer price. This price is typically a balance between the company’s perceived value and what investors are willing to pay. Afterward, shares are allocated to investors, and the company becomes listed on the stock exchange.

6. The IPO Day

The company’s shares become live on the stock exchange on the day of the IPO. Investors now have the opportunity to buy and sell the stock in the open market. If the demand for the company’s stock exceeds supply, the price rises; if not, it may fall below the IPO price.

The IPO Scenario in India

India has witnessed a significant uptick in IPO activity, especially in the last few years. With the rise of technology companies, consumer brands, and financial services firms, India’s IPO market has matured, attracting both domestic and international investors.

Key Data Points:

• 2021: A Record Year for Indian IPOs – India saw over 60 companies go public in 2021, raising more than ₹1.18 trillion (approx. $15.8 billion). This marked the highest number of IPOs in more than a decade.
• Boom in Tech IPOs – Companies like Zomato, Nykaa, Paytm, and Policy bazaar led the charge, showcasing the growing prominence of technology-driven companies in India’s stock market.
• Strong Retail Participation – Indian retail investors have been increasingly participating in IPOs. For example, Zomato’s IPO in July 2021 saw an overwhelming response, with retail subscriptions exceeding 7 times the shares offered.

In my personal view IPOs are a crucial avenue for companies to raise capital and expand their operations. The Indian IPO market has witnessed remarkable growth, reflecting the country’s strong economic fundamentals and investor confidence. As the startup ecosystem continues to evolve, we can expect to see more exciting IPOs in the future.