When a private company plans to sell its privately held shares to the public, it is termed ‘going public’. An Initial Public Offering is a stock issuance by a private company to the public for the first time.
Why does a private company go public?
A small business needs limited capital. However, a business that is capital intensive or has expansion plans needs substantial capital. A private company can access the primary market to raise funds through an IPO.
Features of the IPO market
- In an IPO, the securities are issued directly to the investors
- The primary market is a channel for fundraising
- Helps in the capital formation of the economy
Other types of issue
Apart from the upcoming IPO, be familiar with a few more types of public issues
- Further public offer or follow-on offer (FPO): When a listed company makes another public issue to raise capital, it is called an FPO.
- Offer for sale: Investors like Private Equity Funds, Venture Capital Funds, etc., invest in private companies and are part of its growth story. When these companies become large enough, they decide to sell their shares to the public after issuing offer documents and the shares are listed on the stock exchanges.
- Rights issue (RI):Fundraising from existing shareholders by issuing them new shares is a rights issue. The offer document is called the Letter of Offer. The RI is open for 30 to 60 days.
The IPO Process
The process of an upcoming IPO involves the coming together of various SEBI registered market intermediaries like merchant bankers, bankers to the issue, registrars, and underwriters to the issue, etc. Broadly, the process involves preparing the offer documents, opening the issue, and allotment and listing.
Preparing and filing documents
- Preparation of offer document: A company that plans for IPO must prepare an offer document with enough information and disclosures for an investor to decide to subscribe to the IPO. The offer documents broadly include details of the promoters, the project, financial details, objects, terms of the issue, etc. This document is called the Draft Red Herring Prospectus.
- Merchant bank appointment: A SEBI registered merchant banker gets appointed to prepare the DRHP. They are responsible for the due diligence of the offer document and legal compliance. They also facilitate the marketing of the issue, reaching the public.
- Filing offer document draft with SEBI: The DRHP is filed with SEBI and is available for public viewing on its website.
- Public announcement: This Gets prepared in English, Hindi, and other regional language newspapers.
- Review and finalising: The SEBI reviews the document, and if satisfied with the disclosures, they forward the DRHP with its observations to the merchant banker. After incorporating the observations, the merchant banker files the final offer document with SEBI and the registrar of companies and the stock exchanges. The final document is the Red Herring Prospectus. The final prospectus has additional details such as upcoming IPO dates, price details, updated financial data, etc.
Opening of the issue
- After the legal formalities are complete, the company issues advertisements in English, Hindi, and regional newspapers informing the opening of the IPO.
- The investors then apply for the issue.
- The back-office process of the IPO, such as application form processing, refunds, allotment etc., get handled by the registrar to the issue.
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