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IPO Process: Overview and Working

IPO Process: Overview and Working

In this blog, we will provide an in-depth look at the initial public offering (IPO) process from start to finish. We’ll explain what an IPO is, why companies pursue it, who is involved, the key steps to prepare for an IPO, and the pros and cons of this approach. With private funding rounds getting larger and private companies staying private longer, we’ll also discuss some of the alternatives to a traditional IPO that companies have today.

Table of Contents

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What is an IPO?

An initial public offering (IPO) is the first time a private company offers its stock to the public for purchase. Stock is a share of ownership in a company, representing a claim on part of the company’s assets and earnings. 

Before an IPO, a company is considered a private company, with a relatively small number of shareholders made up primarily of early investors such as founders, their families, friends, and professional investors such as venture capitalists or angel investors. Through the IPO process, a private company transforms into a public company. An IPO is also sometimes referred to as “going public.”

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Importance of IPO

An initial public offering (IPO) is a major milestone for a private company seeking to raise significant capital, gain public status, and tap into public markets. An IPO provides a company with an influx of funds for growth efforts, creates liquidity for early investors, and raises the company’s public profile.

  • Raises substantial capital for company growth initiatives, acquisitions, and working capital needs.
  • The IPO process generates publicity and gets the company’s attention from analysts, the media, and investors. Being publicly traded also enhances the company’s reputation and brand.
  • Being publicly traded opens up new financing options for the company, such as rights issues, follow-on public offerings, convertible bonds, etc. This provides flexibility to raise funds in the future.

Is an IPO Right for Your Company?

An initial public offering (IPO) can be a good option for raising capital and increasing visibility and credibility for some companies. An IPO may make sense if a company has reached a stage of maturity with strong financials, a proven business model, and growth potential. Going public can provide access to larger capital resources to fund expansion or new projects. It also opens up opportunities for founders and early investors to realize returns. The increased transparency and regulatory requirements of being a public company can improve governance. 

However, an IPO involves significant legal, accounting, and underwriting costs. A company has to be prepared to meet ongoing reporting requirements and expectations from public shareholders. Private companies need a strong management team and advisors to navigate the complex process. The decision requires weighing the pros and cons based on the company’s specific situation and goals. With thorough planning and foresight, an IPO can be an effective strategic move at the right juncture in a company’s journey.

Consideration for Going Public

Deciding to take a company public through an initial public offering (IPO) is a major strategic decision. Before pursuing an IPO, there are several important factors a company’s leadership should carefully consider.

An IPO can provide a company with a large capital infusion to fund growth and expansion. However, it also requires meeting regulatory compliance standards and public financial reporting. Going public also subjects a company to pressure from public shareholders and scrutiny from the investor community.

The key factors to evaluate are the company’s financials, business model, industry trends, management team, and reasons for needing capital. Important financial factors are revenue growth, profitability, and size. The company should have a sustainable business model and be in a growing industry. The management team needs experience taking a company public. Finally, the capital from the IPO should have a clear purpose, like funding growth.

What is IPO Process?

What is IPO Process?

The IPO process is how a private company first sells its shares to the public on a stock exchange. Below are the key steps involved in the IPO process for a company:

Step 1 – Hire an Investment Bank or Underwriter

The first step in preparing for an initial public offering (IPO) is selecting and hiring an investment bank or underwriter. The role of the investment bank is to advise the company going public on the IPO process and timeline, help determine the initial share price and valuation, market the offering to investors, and coordinate the sale and distribution of shares. 

Choosing the right investment bank or underwriter is crucial, as they will be guiding the company through the complex IPO process. The company should interview multiple investment banks and evaluate their experience with comparable IPOs, their analyst coverage in the company’s industry, their distribution capabilities, and the services they can provide. 

Step 2 – Submitting RHP and Register with SEBI

The next step is drafting and submitting the red herring prospectus (RHP) and registering the offering with the Securities and Exchange Board of India (SEBI). The RHP is a preliminary prospectus that contains all the key details about the company and the proposed IPO, except for the final offer price and share allotment. It includes information on the company’s business operations, financials, management, industry dynamics, use of proceeds, and details on the number of shares to be offered. 

The investment bank will work closely with the company to compile the extensive information required for the comprehensive RHP document. Once completed, the RHP is submitted to SEBI for review and approval. The company must then register the IPO with SEBI and pay the requisite fees. 

Step 3 – Approval by SEBI

SEBI will thoroughly review the RHP to ensure compliance with regulations and provide feedback. There is often back and forth with SEBI to finalize the RHP, which can take a few months. Once the RHP is cleared by SEBI, the company can proceed to the next steps of the IPO.

Step 4 – IPO Application to Exchanges

Once the prospectus is filed with SEBI and the Securities and Exchange Board of India (SEBI) approves the IPO, the company needs to make an application to one or more stock exchanges to list its shares. The company has to apply to the stock exchange(s) where it wishes its shares to be listed and traded.

Step 5 – Go on a Roadshow

The roadshow is an important part of the IPO process. The company executives and lead managers travel to major financial centers and meet with potential investors to generate interest in the upcoming IPO. The roadshow allows the company to present its financials, business model, growth plans, and valuation to institutional investors like mutual funds, insurance companies, pension funds, etc.

The roadshow helps build momentum and gauge demand for the IPO. It is a critical marketing exercise to ensure the offering is fully subscribed to. The roadshow typically lasts for 2–3 weeks leading up to the opening of the IPO. The company needs to put its best foot forward and effectively communicate its strengths and future potential to investors. A successful roadshow builds a strong order book and sets the stage for a successful IPO subscription.

Step 6 – Pricing of IPO

Now, it’s time for IPO pricing. This is when the company and its investment bankers determine the price at which its shares will be offered to investors in the IPO. There are two main approaches to IPO pricing in India: the fixed price approach and the book-building approach.

In a fixed-price IPO, the issuer and investment bankers decide on a fixed price per share based on their assessment of investor demand and the company’s prospects. This fixed price is stated in the IPO prospectus, and investors bid for shares at that predetermined price. The benefit is that it provides certainty in pricing but does not allow price discovery based on market demand.

In a book-building IPO, a price range is set at 20% with a floor and cap price. Investors bid for shares within this price band, indicating demand at different price levels. The final IPO price is set after the bidding, based on the demand generated. Book building allows efficient price discovery based on investor demand. The drawback is pricing uncertainty until the process is completed.

Step 7 – Shares Allotment

Once the IPO bidding process is completed, the registrar of the issue collects all the bid applications and determines the final allotment of shares. This is done in consultation with the stock exchanges. The allotment is finalized based on the price band, issue size, category of investors, and demand generated. The registrar ensures shares are allotted fairly per SEBI regulations; proportionate allotment is done for retail investors, while qualified institutional bidders (QIBs) and non-institutional bidders (NIIs) may receive allotments at cut-offs. 

Applicants are sent emails/messages by the registrar informing them about their allotment status and the number of shares allotted. The extra money paid by applicants who did not receive a full allotment is refunded to them. The allotment signifies that the shares applied for have now been credited to the applicant’s DEMAT account, and they officially own those shares. After allotment, the issuer company’s share capital increases as more investors become shareholders.

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Pros and Cons of an IPO

When a private company decides to raise investment capital by selling shares to the public for the first time, it engages in an initial public offering or IPO. This major strategic decision has advantages and drawbacks that the company’s leadership needs to weigh carefully.

Pros of an IPO

  • Selling shares to the public markets can raise significant funds for growth and expansion. This influx of cash is hard to match through other means.
  • The IPO process generates publicity and raises awareness of the company. Being publicly traded also brings greater visibility and prestige.
  • An IPO allows founders, employees, and early private investors to convert ownership stakes into tradable shares. This provides them with liquidity.
  • Publicly traded shares can be used as “currency” to facilitate mergers and acquisitions more easily. Stock is often an attractive consideration.
  • Being publicly traded makes it easier to attract talent who prefer stock-based compensation and the prestige of working for a public firm.

Cons of an IPO

  • The process involves sizable legal, accounting, marketing, and other fees. Much preparation is required in the run-up.
  • Public companies face greater regulatory burdens, reporting requirements, and compliance costs than private firms.
  • Founders and executives of public companies have less autonomy and control than private firms, as they must answer to public shareholders.
  • There tends to be intense public scrutiny and pressure to meet quarterly earnings estimates and targets. This can influence strategy.
  • Being publicly traded necessitates disclosing sensitive information that competitors could exploit and that the company would prefer to keep confidential.

IPO Alternatives

Initial public offerings (IPOs) have long been seen as a coveted milestone for startups and private companies looking to raise capital and become publicly traded. However, in recent years, some drawbacks of traditional IPOs have led companies to consider alternative routes to going public.

Before diving into the IPO alternatives, it’s important to understand why a company might want to go public in the first place. The main benefits are increased brand awareness, access to public capital markets for raising funds, liquidity for early investors and employees, and credibility as a public company. However, IPOs also come with downsides like significant legal and accounting costs, market volatility, and loss of control.

This has paved the way for innovative alternatives that aim to democratize public listings. Some popular options include direct listings, SPAC mergers, and Reg A+ offerings. In a direct listing, companies list existing shares directly on an exchange without doing a traditional underwritten IPO. SPAC mergers allow companies to go public by combining with a special-purpose acquisition company. Reg A+ enables mini-IPOs to raise up to $75 million from the general public, not just institutional investors.

While IPOs remain the most iconic path to going public, these alternatives are growing in popularity thanks to their potential cost and time savings, flexibility, and accessibility to individual investors. Companies now have more choice than ever in how they can pursue a public listing that aligns with their goals and values.

Want to know how listed companies issue new shares? Then go through our What is FPO blog.


The IPO process represents a significant step for private companies seeking to raise capital and become publicly traded. While complex, proper preparation and guidance from experienced underwriters can lead to a successful offering. Going public provides companies with greater access to capital for growth but also requires greater financial transparency and regulatory compliance. Overall, the IPO process allows mature private firms to tap public markets, increase brand visibility, and position themselves for the future, despite the benefits and drawbacks of life as a public company.

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What is the process of getting an IPO?

The process of getting an IPO involves hiring an investment bank, filing required documents with the SEC, including a prospectus, going through SEC review, getting exchange approval to list shares, determining the initial share price and number of shares, and finally issuing shares via the investment bank to institutional and retail investors on the offering date.

What is the IPO application process?

The IPO application process involves filing an IPO registration statement, including a prospectus, with the SEC detailing company information, financials, risks, the number of shares to be issued, and the reason for going public. The SEC reviews the application and may request changes. Once approved, the company works with underwriters to market the IPO and determine the initial share price before shares can be issued on the public market.

Is IPO a good option?

An IPO can be a good option for raising substantial capital for growth, gaining public visibility and credibility, creating acquisition currency through stock, and allowing early investors and owners to realize liquidity. However, it also requires meeting regulatory standards, disclosing sensitive information, and quarterly reporting, so it may not be the best option for all private companies.

Can a normal person buy an IPO?

Yes, a normal individual investor can purchase shares in an IPO, though the initial allocation is typically dominated by institutional investors. Individuals may be able to buy shares after trading starts on an exchange through a brokerage account, but availability and share price may fluctuate initially.

How much money is required for an IPO?

There is no set amount required for an IPO, but most companies aim to raise at least $100 million or more of capital through the IPO process. A larger capital raise can help attract interest from investment banks and institutional investors while covering the substantial costs of undertaking an IPO.

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About the Author

Vice President

With an MBA in Finance and over 17 years in financial services, Kishore Kumar boasts expertise in program management, business analysis, and change management. Notable roles include tenure at JPMorgan, Nomura, and BNP Paribas. He is recognized for commitment, professionalism, and leadership.