How to Launch an IPO in India?

9 min read • Published 3 April 2023
Written by Jatin Pareek

Initial Public Offering (IPO) is the process of offering shares of a private company to public for the first time in a new stock issuance. The principal aim of launching an IPO is to raise capital from public investors by diluting equity shares 

Launching an IPO transforms a privately owned company into a public company. This also creates an opportunity for investors to earn lucrative returns from their investments.

However, for coming out with an IPO, a company needs to fulfil various eligibility parameters. Then, they need to go through the process of making disclosures to the public and getting approval from regulatory bodies. 

The following sections will cover how this works and other important details of launching IPOs.

How to Launch an IPO?

There are several steps which a company goes through for launching an IPO. These are: 

  • Appointing an Underwriter or Investment Banker

To start the IPO process, a company seeks advice and guidance from underwriters employed by investment bankers. These underwriters will help this company finalise crucial details like how much money it hopes to raise, the types of securities on offer and its initial price per share.

  • Preparing the RHP and Registering with SEBI

Next, this company must prepare a draft prospectus, which is called the Red Herring Prospectus (RHP). It is mandatory to submit this document under the SEBI and Companies Act. This document makes all the requisite disclosures required for an IPO. This includes the company’s financial data, business description, approximate price per share, future plans and associated risks.

As a part of its statement, the company will have to disclose how much funds it intends to raise from the public and how it will be utilised. This document has to be submitted to the Registrar of Companies at least 3 days before launching an IPO. 

  • SEBI Verification

After submitting its RHP, the company must make an application for an IPO to SEBI (Securities and Exchange Board of India). SEBI will verify all facts disclosed by the company. It will look for mistakes, discrepancies and omissions. If everything is in order, SEBI will approve the IPO, after which the company can announce a launch date.

  • Seeking Approval from Stock Exchange

To be listed with a recognised stock exchange, the company has to get approval from it. Both stock exchanges, be it National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE), have a series of eligibility criteria private companies must fulfil to get listed. 

Thereafter, the company has to make an application to the respective stock exchange to float its IPO.

  • Marketing via Roadshows

Before an IPO is released in the market, every company endeavours to create a buzz for it through roadshows. For around 2 weeks, this company’s executives will advertise their IPO release and its potential for profits across the country. 

This marketing strategy aims at attracting potential investors. The company’s key features are shared with various people, including financial institutions, business analysts and fund managers. Issuers also arrange Q/A sessions, group meetings, online virtual roadshows and presentations to capture the attention of investors.

  • Pricing of IPO

Now the company has to fix the pricing of its IPO. They can either launch a fixed-price IPO or can use the book-building method. In a fixed-price IPO, the price of shares is announced in advance. However, in the book-building method, the company announces a price range of 20% for investors to place their bids. This is called the IPO’s price band.

Investors have to place their bids according to the company’s quoted lot price. The lot price is the minimum number of shares an investor must purchase. The company floating an IPO will also provide a floor price (minimum bid price) and a cap price (maximum bid price). 

Bidding remains open for 3 to 5 working days. Investors are allowed to revise their bids within this time. After the bidding is complete, the company decides the cut-off price, which will become the final price at which the issue will be sold.

  • IPO Share Allotment

After the IPO is finalised, the company and its underwriters will decide on the number of shares that will be allotted to each investor. In case there has been an under-subscription, every bidder will get their allotments. 

However, for an over-subscription, the issuer will make partial allotments to investors via a lottery system. This is done within 10 working days of the date of the last bidding.

Eligibility Criteria for Launching an IPO

There are certain eligibility parameters that a company has to satisfy to launch its IPO in India. These eligibility criteria are as follows:

  • The net worth of a company should be at least ₹1 crore in the previous 3 years.
  • Its total market capitalisation must be at least ₹25 crore.
  • A company has to have tangible assets worth at least ₹3 crore in the previous 3 years. 
  • The minimum paid-up equity capital of a company after its IPO must be at least ₹10 crore.
  • At least 50% of the company’s tangible assets should be in the form of cash or cash equivalent.
  • To launch an IPO, it must have an average operating profit of at least ₹15 crore (without tax) in each of any three years among the previous 5 years.
  • In case the company’s name has been changed, it has to show that 50% of the total revenue earned in the last year came from activities undertaken after changing the name change.
  • The total value of the IPO should not be more than 5 times the net worth of the company.

SEBI also ensures that deserving legitimate companies are not held back by these profitability norms. In order to provide some flexibility to companies for accessing the primary market, SEBI has provided the QIB route.

In the QIB route, an IPO has to be issued through the book-building method. Out of the entire offer, at least 75% of the issue size must be allotted to QIB (Qualified Institutional Buyers) investors. A company issuing such an IPO has to refund the full subscription money if that minimum allotment requirement is not met.

Expenditure For Launching IPO

Launching an IPO involves a lot of associated costs. First, you have to pay the underwriter’s fees. This fee depends on the size and the risk profile of a company.

Depending on various factors, the underwriter’s fee could vary between 2.5% and 5% of an IPO’s value.

After that, you also will have to pay an audit fee. You also need to pay additional fees for listing on stock exchanges. This fee can be ₹50,000 or more. There is also a yearly fee for listing on stock exchanges that you have to pay.

Thus, launching an IPO itself involves considerable capital investment.

Advantages and Disadvantages of IPO

Launching an IPO has a lot of benefits. Some of the principal advantages of launching an IPO are:

  • It enables a private company to raise a significant amount of money.
  • Issuing shares through IPO enables a new form of payment. Thus, now you can use publicly traded stocks as a means of payment.
  • Getting listed in stock exchanges provides your company with exposure and publicity.
  • Raising money through launching an IPO decreases the cost of capital since you do not have to pay any interest on it.
  • After becoming a publicly-owned company, it will become easier to initiate mergers and acquisitions.

There are also several disadvantages associated with launching an IPO that you need to keep in mind. Some of them are given below:

  • Launching an IPO is a time-taking affair. It takes between 6 months to 1 year to launch an IPO.
  • After launching an IPO, your company will have to meet higher regulatory and disclosure requirements. 
  • Launching an IPO puts your company under a lot of pressure to increase its profits rapidly.
  • Since after launching an IPO shares will be diluted to the public, it also involves a risk of losing effective control over the company.

Final Words

Launching an IPO is a pivotal step towards the growth of a company. Apart from raising the much-needed capital for its expansion, getting listed on stock exchanges also makes the company popular.

However, despite its numerous advantages, launching an IPO also requires a lot of capital. Thus, many companies opt for other alternatives to raise funds, like debt, refinancing and joint ventures. Thus, before launching an IPO, consider its pros and cons and decide accordingly.

Frequently Asked Questions

Can a company launch more than 1 IPO?

No. A company can launch an IPO only once. However, later on, they can resort to Follow-On Public Offer (FPO) when they require raising extra funds from public investors.

What are the risks associated with launching an IPO?

Launching an IPO carries some disadvantages and risks. It can be a time-consuming process which can take up to one year. It is also an expensive process which involves multiple charges, such as the underwriter’s fees and audit fees.

What is the purpose behind launching an IPO?

When a company issues its shares in the public domain for the first time, it does so to raise capital from the public. It can use the funds accumulated by selling equity for its growth, new R&D projects and expansion. It can also repay its debts or launch new products/services. An IPO also helps to create a buzz around a company among customers and investors. 

What are the metrics for judging the performance of an IPO?

An IPO is considered successful if its total market capitalization is equal to or greater than that of its competitors within 30 days of an IPO’s launch. Another metric for a successful IPO is when the difference between the offering price and market capitalization of an issuing company is less than 20% within 30 days after the IPO launch.

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Jatin Pareek

Investment Associate
Jatin is an Investment Professional in the making with expanding expertise in the debt and equity markets. He has completed his Bachelor of Technology in Civil Engineering from the Manipal Institute of Technology. He has helped build Wint Wealth in various capacities ranging from being a member of the Investor Relations Team to contributing actively at the Founder's Office. He has been an integral part of the Assets Team for about a year now.

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