Report On IPO Process

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Report On

IPO PROCESS

By:
Balaji Bapurao Gaikwad
19BSP0637

Motilal Oswal Financial Services Ltd.

Submitted to,
Mr. Abhishek Kumar (company guide)
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TABLE OF CONTENTS

Sr. No. CONTENTS Page. No.

1. INTRODUCTION 3

2. ADVANTAGES 3

3. DISADVANTAGES 3

4. ELIGIBILITY CRITERIA 4

5. PROCESS 5-6

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1. INTRODUCTION-

 An Initial public offering (IPO) or stock market launch is a type of public offering
where shares of stock in a company are sold to the general public for the first time.
 This is done by offering those shares to the public, which were held by the promoters
or the private investors.
 This is why doing an IPO is also referred to as "going public."
 IPO’s are often issued by smaller, younger companies seeking capital to expand, but
can also be done by large privately-owned companies looking to become publicly
traded.
Through this process, a privately held company is transformed into a public company.
Initial public offerings can be used to raise new equity capital for companies,
to monetize the investments of private shareholders such as company founders or private
equity investors, and to enable easy trading of existing holdings or future capital raising by
becoming publicly traded.

2. ADVANTAGES-
An IPO accords several benefits to the previously private company:
 Enlarging and diversifying equity base
 Enabling cheaper access to capital
 Increasing exposure, prestige, and public image
 Attracting and retaining better management and employees through liquid equity
participation
 Facilitating acquisitions (potentially in return for shares of stock)
 Creating multiple financing opportunities: equity, convertible debt, cheaper bank
loans, etc.

3. DISADVANTAGES-
There are several disadvantages to completing an initial public offering:
 Significant legal, accounting and marketing costs, many of which are ongoing
 Requirement to disclose financial and business information
 Meaningful time, effort and attention required of management
 Risk that required funding will not be raised
 Public dissemination of information which may be useful to competitors, suppliers
and customers.
 Loss of control and stronger agency problems due to new shareholders
 Increased risk of litigation, including private securities class actions and shareholder
derivative actions.
4. ELIGIBILITY CRITERIA-

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SEBI has dictated the following criteria that need to be fulfilled:
 The company should have at least Rs 15 crore as its pre-tax operating profit in the last
three years
 A total net worth of at least Rs.1 crore each in the preceding three years
 Net tangible assets of at least Rs. 3 crores in the preceding three years, of which not
more than 50% must be kept in the form of monetary assets.
 If the company has undergone any merger and now operates with a different name
than it first started with, it has to provide a proof that almost 50% of its revenue from
the past year was generated by doing business with the changed name.
 The issuing size should not be more than 5 times the pre-issue net value
 The issuing company has to adhere to certain regulations under the Securities
Contracts (Regulations) Act 1956 and Securities, Exchange Board of India Act 1992
and others.
If a given company, does not qualify these criteria, an alternate way is suggested by the
SEBI, called the QIB route under which the POI can be issued under the book building
route. The company can allot almost 75% of its public offering to Qualified Investment
Buyers (QIB), who are expert institutional buyers closely working with SEBI.

5. PROCESS-

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There are 7 essential steps involved in the listing process through an IPO. 
 Step 1: Hire an investment bank
 Step 2: Register with SEC
 Step 3: Draft the Red Herring document
 Step 4: Go on road show
 Step 5: IPO is priced
 Step 6: Available to public
 Step 7: Going through with the IPO

Step 1: Hire an investment bank-


A company seeks guidance from a team of under-writers or investment banks to start the
process of IPO. More often than not, they take services from more than one bank. The team
will study the company’s current financial situation, work with their assets and liabilities and
then they plan to cater to the financial needs. An underwriting agreement will be signed
which will have all the details of the deal and the amount that will be raised, the securities
that will be issued.
Step 2: Register with SEC-
The Company and the under-writers together file the registration statement which
comprises of every fiscal data and business plans of the company. It will also have to declare
how the Company is going to utilize the funds it will raise from the IPO and about
the securities of public investment. 
If the registration statement has compliance to the stringent guidelines set by the SEC,
which ensures that the company has disclosed every detail a potential investor should
know, then it gets a green signal. 
Else it is sent back with comments. The company should then work on the comments and
file for registration again.

Step 3: Draft the Red Herring document-


An initial prospectus which contains the probable price estimate per share and other details
regarding the IPO is shared with the people who are involved with the IPO. It is called a red
herring document because the first page of the prospectus contains a warning which states
that this is not a final prospectus. This phase tests waters for the IPO among the potential
investors.
 
Step 4: Go on road show-
Before the IPO goes public, this phase happens over an action-packed two week. The
executives of the Company travel around the country marketing the upcoming IPO to the
potential investors, mostly QIBs. The agenda of the marketing includes presentation of facts
and figures, which will drum up the most positive interest.

Step 5: IPO is priced-


Based on whether company wants to float a fixed price IPO or Book Building Issue, the price
or price band is fixed. A fixed price IPO will have a fixed price in the order document, and
the book building issue will have a price band within which an investor can bid. Number of
shares that will be sold is decided. The Company should also decide the stock exchange

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where it be going to list their shares. The Company asks the SEC to announce the
registration statement effectual so that purchases can be made. 

Step 6: Available to public-


On a planned date, the prospectus and application forms are made available to public online
and offline. People can get a form from any designated banks or broker firms. Once they fill
in the details, they can submit them with a cheque. Or they can submit it online as well. SEBI
has fixed the period of availability of an IPO to public, which is usually 5 working days.

Step 7: Going through with the IPO-


After the IPO price is finalized, the stakeholders and under-writers work together to decide
how many shares will every investor receive. Investors will usually get full securities unless it
is oversubscribed. The shares are credited to their demat account. The refund is given if the
shares are oversubscribed. Once the securities are allotted, the stock market will start
trading the Company’s IPO.

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