Initial Public Offering (IPO) is a process where a private company issues it’s shares to public investors in order to raise huge amount of capital. IPO is issued in the primary market where the shares are going to be issued for the very first time.
A private firm have private investors mostly family, friends, venture capitalists/angel investors and if the firm believes that the firm has grown enough to the unicorn stage it plans to make an IPO.
There are many steps to be followed by a company to go public which are mentioned below:
- UNDERWRITERS/INVESTMENT BANKS
- APPROACHING SEC (SECURITIES EXCHANGE COMMISSION)
- RED HERRING DOCUMENT
- PRICE FIXATION
- UNDERWRITERS/INVESTMENT BANKS:
The company hires underwriters/investment banks and they together work on the current financial position of the firm and fixes the amount to be raised from public. They make underwriting documents. The underwriters assure about the rise of capital but its not a promise.
- APPROACHING SEC (SECURITIES EXCHANGE COMMISSION):
The company along with the underwriters fills the registration by providing details regarding the business models, plans, and fiscal data of the firm. They also mention the details behind issuing an IPO.
If the company satisfies the stringent rules of SEC it will make an approval, if not it specifies the reasons behind rejecting. The company can rectify and register again for approval.
- RED HERRING DOCUMENT:
This document consists of rough details about the probable price of the share, key details about the company and persons involved in the IPO. This document can be called an initial prospectus.
The company publicizes the shares going public showcasing every detail about it through journals, broadband media, news outlets, and many possible ways.
- PRICE FIXATION:
Later the price of the IPO is fixed through any of the following ways:
- Fixed price IPO: This has a fixed price in the order document.
- Book building process: In the book building process a price range is set and is open for the investors to bid in that band. Oftentimes, the most common bid is considered as the IPO price.
After finishing all the steps mentioned above the subscription forms for the shares were made available to the general public through all brokerage firms and banks. Payments can be made both online & offline. The subscriptions are open for 5 days.
Underwrites goes through the IPO subscriptions and decides how many shares have to be allotted to each investor. If oversubscribed the preferred quantity by the investor may not be allotted and the refund is made. The shares are credited to the Demat account of the investor and then the shares trade on the exchange (secondary market).