Understanding the IPO process

IPOs are a way to raise capital from the stock market and list on a stock exchange. When a company comes up with an IPO, it may issue fresh shares or the existing promoters may sell part of their existing stake. The latter is called offer for sale (OFS). IPOs also serve as an exit route for strategic investors, who will find it easier to monetise their holdings if the company is listed.

The market regulator SEBI has laid down several eligibility requirements which need to be fulfilled before a company can list on stock exchanges. The first route to list is the profitability route, where a company must meet certain profit-related parameters. If it doesn't fulfil any of the parameters, it can still list through the QIB (qualified institutional buyer) route. However, through the QIB route, it can raise only 10 per cent of the offer amount through the retail segment. As much as 75 per cent has to be raised through institutions. This provision is meant to safeguard the interest of small investors, who may not have the sophistication to analyse a comparatively riskier business.

Steps involved in an IPO

1. APPOINTMENT OF INVESTMENT BANKERS/LEAD MANAGERS/UNDERWRITERS: These are financial experts who carry out various IPO processes and formalities on behalf of the company and act as intermediaries between the company and investors.

2. FILLING OF PROSPECTUS AND GETTING SEBI'S NOD: The company then has to file an application for an IPO with SEBI, along with the draft prospectus of the issue, details of the promoter and company's annual reports, along with the relevant listing fees. After getting approval from SEBI, the company files applications with the stock exchanges where it plans to list its securities.

3. ROAD SHOWS: These include marketing, advertising and creating the buzz around the IPO.

4. FILLING OF RHP AND IPO PRICING: The company is further required to file an updated red-herring prospectus, which includes all the latest financial information and details of the IPO pricing and process. There are two types of IPO pricing process:
Fixed-price issue: The issuer itself decides the issue price of shares and mentions it on the offer document if all the requirements are met under the profitability route.
Book-building process: When certain eligibility requirements are not met, companies are mandatorily required to go through this process, which involves price discovery. Under this, the company discloses a price band for the issue and the 'cut-off' price for the issue is discovered on the basis of bids received from prospective investors.

5. ALLOTMENT: After completion of the bidding, the next step is the allotment of securities by the issue registrar. In case of oversubscription, the shares are allotted on the basis of different criteria, depending on the investor categories. Usually, bidding is open for three days. However, in case of undersubscription, the time period could be further increased up to a maximum of 10 days.

6. LISTING OF SECURITIES: After the allotment process, the securities of the company are listed on the stock exchanges. However, certain shareholders such as anchor investors and QIBs are subject to a lock-in period, which restricts them from immediately selling their shares after listing.

Categories of investors and allotment criteria

Qualified institutional buyers (QIB): These include institutions such as mutual funds, venture-capital funds, foreign institutional investors, commercial banks, insurance companies, provident funds and pensions funds.

Under this category, there could also be a sub-category of 'anchor' investors. These are investors who take part in the IPO before the issue opens for the public. Their applications should be for more than Rs 10 crore and a maximum of 60 per cent of the QIB portion can be allocated to anchor investors.

While allotment to QIBs is on a proportionate basis, for anchor investors, it is discretionary and, on a case-to-case basis. They both are subject to a lock-in period of 30 days from the listing of the IPO.

Retail investors: Individual investors who bid for securities worth not more than Rs 2 lakh come under this category. They are not subject to any lock-in and the allotment is through a lottery.

Non-institutional investors (NII): Investors who do not fall under the above two categories, for instance, those who bid for more than Rs 2 lakh and are not institutional investors fall under this category. They are allotted shares on a proportional basis and are not subject to any lock-in period.

Apart from these, there could be other categories for whom reservation can be made and discounts given. These include employees and shareholders of the parent in the case of listing of a subsidiary.

What is GMP?
Grey market is an unofficial market where shares are bid and offered by traders through dealers before listing. These markets are not regulated by SEBI, trades are carried on trust and carry high risks. GMP (Grey market premium) is the premium that the buyers in the unofficial market are ready to pay to the sellers (IPO Allottees) in exchange for their shares. The premium amount is above and over the IPO issue price of the security. Although GMP can provide a reasonable picture of the listing price of the security, that is not the case always. Thus, an investor should not invest in the IPO on the basis of grey market premium rather should carefully assess the fundamentals of the company before investing.

What is ASBA?
ASBA stands for 'application supported by blocked amount'. It is a mode of IPO application where the amount is earmarked in your bank account and is not debited at the time of application. If you are later allotted shares, the amount is debited. Earlier one had to pay the entire amount at the time of IPO application and in case of non-allotment, a refund was issued. The convenience of ASBA is one of the reasons behind the popularity of IPOs.