What is IPO Cycle & How Does it Work?

The phrase "IPO" is likely familiar to you from news reports, particularly when large corporations like Zomato, Paytm, or LIC choose to "go public."  However, what is an IPO exactly?  What is IPO cycle, by the way?  Let's put it in plain language.

What is an IPO?

IPO stands for Initial Public Offering.

It is the procedure through which a privately held company offers its shares to the public for the first time, turning it becomes a public company.  Simply said, it means that a business is raising money to expand by selling shares, or a portion of its ownership, to the general public.

What is the purpose of going public through IPO?

Following are the few reasons why companies go for an IPO:

• When company needs money to expand the business
• When company wants to reduce debt
• When company wants to increase their brand value
• When company wants to give early investors or founders a chance to cash out

What is IPO Cycle?

The cycle of IPO is the systematic procedure that a business goes through in order to go public. The steps of IPO are Planning, clearances, marketing, and ultimately listing the shares on a stock exchange such as the NSE or BSE.

Let’s break down the IPO cycle into simple steps:

1. Company makes the decision to Go Public:

The company's board and top management decide it's time to raise funds by going public for a particular reason.

1. Hiring Experts

Experts such bankers or underwriters guides the company regarding paperwork, pricing the IPO, and selling the shares. These experts are hired the company.

1. Due Diligence & Documentation

A lot of paperwork is involved in the IPO process. Financial reports are prepared and Legal checks are also done. A document called DRHP (Draft Red Herring Prospectus) is created. It contains the company's business, finances, risks, and how the raised money will be used.

1. To file for the IPO, approval from SEBI is required

SEBI i.e. Securities and Exchange Board of India reviews DRHP submitted by the company to ensures that everything is in order and protects interests of investors.

1. Marketing the IPO

The company and bankers advertise the IPO to investors prior to its opening. This develops curiosity and confidence amongst investors.

1. Allotment of Shares

Investors apply for the IPO through broker. After completion of bidding period, Shares are allotted to investors. In general, IPO is oversubscribed i.e. no. of applications are more than the actual quantity. If the IPO is oversubscribed, not everyone may get shares. Investors get refund in case of non-allotment. Further, money gets debited from the bank account only of allotment.

1. Listing on Stock Exchange (NSE/ BSE)

After listing of company's stock on stock exchanges like NSE or BSE we can say that the allotment process is completed. On listing day, the stock starts trading and the IPO process is complete.

Steps of the IPO Cycle:

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Conclusion: 

An initial public offering (IPO) is a major step for any business and an opportunity for early public investment.  However, thorough research is also necessary before making an investment.  A company's success is not assured just because it plans to go public.

Knowing the IPO cycle enables you to comprehend how a private firm goes public and helps you make smarter investing choices.