What do you understand about the IPO cycle?

An Initial Public Offering (IPO) is the first time a company issues its shares to the public. This is how businesses go from being ‘private’ to ‘public.’ In other words, a company that was privately owned up until the Initial Public Offer, becomes a publicly-traded company. As an investor, you have access to the company’s shares directly through a stock exchange. You buy these shares and, then, become a shareholder of the company.

Recently, the food-aggregator giant Zomato issued a massively popular IPO. Additionally, the currently privately held Paytm aspires to be publicly listed shortly. A public listing helps in raising capital for the company and also unlocks value for its existing shareholders. Let’s decode the meaning of an IPO cycle.

What is an IPO Cycle?

The IPO isn't simply one mega-event that takes place on one random day. The life cycle of an IPO or otherwise called an IPO cycle is rather comprehensive and time-consuming.

Several regulatory compliances require to be fulfilled, essentially with SEBI– The Securities and Exchange Board of India. The formal process to create and issue an IPO is properly structured and extensively documented. To be completely fair, the metamorphosis a company witnesses when going public, warrants all that bureaucracy.

Once a company decides to go public, it has to hire one or more investment bankers to manage the entire process from start to finish and additionally act as an underwriter for the issue. Ensuring legal compliance is an essential requisite that warrants hiring a team of lawyers or engaging the legal department of the company if it has one.

The IPO cycle consists of broadly the following steps:


  1. Registration and Approval by SEBI

    The very first step is submitting a registration statement to the Securities and Exchange Board of India. This statement typically provides information on the company’s financial health and its potential business plans. SEBI scrutinizes the same and subsequently gives its approval or disapproval.

  2. Preparation of a Draft Prospectus

    The company is then meant to prepare the Draft Red Herring Prospectus (RHP). The DRHP is a detailed document that lists the financial performance and stability, business plans, office & plant locations, and the expected price range of the IPO of the company. This is where investment bankers step in. The DRHP is meant for the perusal of potential investors.

  3. Roadshows

    For an IPO to be successfully subscribed, you have to acquire and nurture the investors’ interest. Management staff and investment bankers embark on ‘roadshows’ across the country. They visit major commercial centers in an attempt to attract HNIs (high net worth individuals) and large corporations. These roadshows involve indulging their audience in the company’s business plans and growth potential.

  4. Approval by SEBI

    SEBI either approves the registration statement or suggests some or many amendments to the DRHP. In the latter case, the approval is subject to making the instructed amendments.

  5. Price band

    The company gives a tentative price band in the ready DRHP. The final price band is announced after the issue gets approval from SEBI. In the case of fixed price IPOs, the price of the issue is announced by the company. They may also decide the price later. This is called the book building method. The company and the underwriters also finalize the size of the IPO along with the price band.

  6. Bidding

    Once there is a number on the size and the price band of the issue, the dates for the same are determined. On the announced dates, which tend to get very exciting for many, investors may place their bids to purchase the shares of the company.

  7. Share Allotment

    After the bids, and by extension the issue, close, the company’s investment bankers analyze the bids and decide a cut-off price. Subsequently, the shares are allotted to investors in proportion to their bids.

  8. Listing

    After the closure of bids and the allotment of shares, the shares of the company are successfully listed on the stock exchanges. The shares are credited into the Demat account of the investors who were allotted shares. Those who do not get a shared allotment, receive their money back.

Final word

The IPO cycle is lengthy for the company and the underwriters. Investors should study the DRHP in detail and place the bids sensibly. Subscribing to the IPO of a company has become as easy as shopping for fashion online. For instance, trading on the IIFL mobile app is extremely simple and convenient.

Happy investing. Happy trading.