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How does an IPO work

How does an IPO work?

The IPO process begins with the filing of the Draft Red Herring Process (DRHP) and ends with the listing of the stock on the stock exchanges. In between it goes through IPO pricing, determination of issue size, determination of price band and the actual management and marketing of the IPO issue. The process ends when the bell ringing ceremony coincides with the listing and trading of the stock.

Getting the groundwork for the IPO

The groundwork for the IPO begins with identifying the investment bankers. They are the book running lead managers (BRLM) who will begin with the filing of the DRHP. After the DRHP is approved by SEBI, the planning of the issue in terms of pricing, demand estimation, marketing etc begins. Once these steps are done, the company is ready for the actual issue.

5 Key Steps Involved in an IPO

Filing the DRHP
The first step is to file the DRHP (Draft Red Herring Prospectus) with SEBI and get the approval. Once the approval is ready, the BRLMs get down to the job of working out the remaining specs pertaining to marketing, printing of forms, publicity for the issue, IPO price gauging etc. This is the first step.

Marketing the issue
The second and very important step is the marketing of the issue. The issue has to be separately marketed to HNIs and to institutions. Retail has to be approached through broking networks and through the media campaigns. Normally, IPO BRLMs along with the company management conduct road shows across key global centres like New York, Boston, London, Singapore and Hong Kong to build institutional interest for the issue.

Pricing the IPO
Once the demand for the IPO is gauged, the company and the BRLM get down to deciding how to price the IPO. Normally, the IPO price range is fixed so as to get a trade-off between the best price and the best demand from investors. The idea is normally to leave some returns for the investors so that they can also make profits on listing.

Price discovery
The fourth stage starts once the issue opens. The demand patterns of the IPO are monitored regularly and the company and the BRLMs activate their networks to push towards a higher level of oversubscription. Once the final price is discovered (ideally at the upper end of the band), the basis of allotment is finalized in consultation with the stock exchanges.

Listing of the issue
The last step in the entire process is the actual listing of the stock. The listing is normally preceded by the listing ceremony and the ringing of the first trade bell. Once the stock is listed it becomes a listed stock on the secondary markets. Post-listing performance of the stock is quite critical for the image of the company and the BRLMs.

Three Silent Players in the Entire IPO Process

The success of an IPO depends on the quality of the issue and the aggression of the investment bankers (BRLMs). But there are 3 very silent players in an IPO who are critical to making the IPO a success…

Marketing network

IPO can never be successful unless it is backed by very aggressive marketing. The huge network of brokers, sub-brokers, franchisees and individual agents play a big role. Most of them work on a commission basis but the success of an IPO would be impossible without the avid support of all these agents and distributors.

Registrar and transfer agent
The Registrar to an issue plays a very important role. Normally, the task of IPO registry is assigned to professional registrar and transfer agents like Karvy, In-time among others. They manage the share records, work out the actual allotment of shares, ensure that the shares are transferred into the respective DP accounts and give the complete MIS to the company and to the BRLM. They form the administrative backbone of any IPO.

Company Secretary
Finally, the company secretary of the issuer plays a critical role in handling all legal and compliance matters pertaining to the issue to avoid any regulatory hassles or questions in the future. Each of them form an important part of the IPO loop!



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