What is an IPO? Why do companies go for an IPO? How does the IPO process work in India? What is the role of a merchant banker? These are some of the most common questions asked by retail investors and beginners in the stock market. In this chapter, we will break down the entire Initial Public Offering (IPO) journey, from its purpose and process to key terminology and recent IPO examples in India. Whether you’re planning to invest in an upcoming IPO or simply wish to understand how companies raise capital, this chapter is your ultimate beginner-friendly guide.
5.2 – Why Do Companies Launch an IPO?
The primary reason companies go public is to raise capital, often for CAPEX (Capital Expenditure). But that’s not all. Companies also opt for IPOs to:
- Repay existing debt
- Provide an exit opportunity to early investors (VCs, promoters)
- Reward employees via ESOPs
- Enhance brand value and visibility in the market
In simple terms, an IPO gives the company a chance to grow faster by accessing funds from the public.
5.3 – Role of the Merchant Banker (BRLM)
Before going public, companies hire a merchant banker (also known as Book Running Lead Manager or BRLM). Their responsibilities include:
- Conducting financial and legal due diligence
- Drafting and submitting the DRHP (Draft Red Herring Prospectus) to SEBI
- Helping the company determine a suitable price band
- Managing the book-building process
- Coordinating roadshows and marketing efforts to attract investors
In essence, merchant bankers are the backbone of the IPO process.
5.4 – Step-by-Step IPO Process
- Appointment of merchant banker(s)
- Submission of registration statement to SEBI
- SEBI approval and feedback
- Preparation and circulation of DRHP
- Roadshows and investor marketing
- Finalization of the price band
- Opening of the issue for public subscription (bidding phase)
- Share allocation and stock exchange listing
5.5 – What Happens After the IPO?
Once shares are listed, they begin trading on the stock exchange (NSE/BSE). The stock price fluctuates based on demand and supply. This is known as the secondary market, where investors can buy or sell shares freely.
5.6 – Common IPO Terms to Know
- Under-subscription: When the IPO receives fewer bids than offered shares.
- Oversubscription: When the demand exceeds the available shares.
- Green Shoe Option: Allows companies to issue additional shares in case of high demand.
- Fixed Price IPO: IPO price is fixed in advance.
- Price Band & Cut-off Price: The price range for bidding. Cut-off price is the final price decided after the book-building process.
5.7 – Recent IPOs in India (Table)
| S.No | Company Name | IPO Size (₹ Cr) | Lead Manager(s) | Listing Date | Price Band (₹) |
|---|---|---|---|---|---|
| 1 | Adani Wilmar | 3600 | Kotak, JP Morgan | 8 Feb 2022 | 218 – 230 |
| 2 | Delhivery | 5235 | Kotak, BofA, Citi | 24 May 2022 | 462 – 487 |
| 3 | Ethos Ltd | 472 | MK Ventures, InCred | 30 May 2022 | 468 – 472 |
| 4 | Aether Industries | 808 | HDFC, Kotak | 3 June 2022 | 610 – 642 |
| 5 | Tracxn Technologies | 310 | IIFL Securities | 20 Oct 2022 | 75 – 80 |
Summary
- IPOs help companies raise capital, reduce debt, and unlock early investor value.
- Merchant bankers manage the entire IPO process including DRHP and pricing.
- SEBI approval is mandatory before the IPO is launched.
- DRHP is the most important document every investor should read.
- Most IPOs in India are issued through the book-building method.
An IPO seems like a great way for companies to accelerate their growth by tapping into public funds. It’s fascinating how merchant bankers play such a crucial role in making this process smooth and successful. I wonder if the benefits of going public always outweigh the potential risks involved. Do companies ever regret their decision to launch an IPO? It would be interesting to hear from those who’ve experienced it firsthand. What’s your take on the long-term impact of IPOs on a company’s culture and operations? I’d love to hear your thoughts or any personal experiences you might have!
Hey, thanks for the awesome comment! Loving your curiosity about IPOs—great points! Here’s my take:
Timing an IPO: It’s a mix of financial and strategic factors. Companies need strong financials (growth, low debt) and a hot market with eager investors. Strategically, they might align with industry trends or aim to outpace competitors. 2024 saw Indian firms nailing this with a booming market!
Balancing Expectations vs. Vision: Tough one! Public companies face pressure for quick profits, but the best ones stay true to their mission by using IPO funds wisely and keeping shareholders in the loop. Strong leadership is key.
Smaller Companies & IPOs: Absolutely, SMEs can shine \benefit big time from IPOs, especially on BSE SME/NSE Emerge. They get capital, credibility, and investor exits, but need solid plans and banker support to handle costs and scrutiny. Larger firms have an edge, but SMEs with strong fundamentals can shine too!
Risks vs. Rewards: Rewards are huge—capital, visibility, growth (think Delhivery). But risks like market swings, compliance costs, and diluted control are real. Well-prepared companies come out on top with smart planning.
Really enjoyed this convo! Got more IPO questions or want to dig into recent SME IPOs? Let me know!
This explanation of IPOs is quite straightforward and easy to understand. I appreciate how it highlights the role of merchant bankers in the process. It’s interesting to see how public funding can accelerate a company’s growth. However, I wonder if there are any risks involved for the company when going public. Do you think smaller companies should consider IPOs, or is it better suited for larger corporations? Also, how do merchant bankers ensure the success of an IPO? I’d love to hear more about the challenges they face. What’s your take on the long-term impact of IPOs on a company’s growth trajectory?
Thank you for your thoughtful comment and for appreciating the clarity of the IPO explanation! You’ve raised some excellent questions about the risks, suitability for smaller companies, the role of merchant bankers, and the long-term impact of IPOs. Let me address each point to provide a comprehensive response.
Risks Involved for Companies Going Public
Going public through an IPO offers significant opportunities but comes with notable risks. These include:
Market Volatility: Post-IPO, a company’s stock price can fluctuate due to market conditions, investor sentiment, or external economic factors, potentially affecting its valuation and reputation.
Regulatory Compliance: Public companies face stringent SEBI regulations, requiring ongoing disclosures, audits, and governance standards, which increase operational costs and complexity.
Loss of Control: By issuing shares to the public, promoters may dilute their ownership, potentially leading to reduced decision-making power if institutional investors gain significant influence.
Short-Term Pressure: Public companies are under constant scrutiny to deliver consistent financial performance, which may force management to prioritize short-term gains over long-term strategy.
Reputational Risk: If an IPO underperforms or the company fails to meet investor expectations, it can damage credibility and brand value.
Suitability of IPOs for Smaller Companies
Smaller companies, particularly SMEs, can benefit from IPOs, especially through platforms like BSE SME or NSE SME, which are designed for growth-stage firms. These platforms have relaxed eligibility criteria and lower compliance costs compared to mainboard IPOs. However, smaller companies should carefully assess their readiness:
Pros: SMEs can access capital for expansion, enhance credibility, and provide liquidity for early investors. For instance, many Indian SMEs have used IPOs to scale operations and compete with larger players.
Cons: Smaller firms often lack the financial stability, brand recognition, or operational scale to withstand public market scrutiny. High debt levels or inconsistent revenue can deter investors, leading to poor subscription or listing performance. For smaller companies, an IPO is suitable if they have a clear growth plan, strong financials, and the ability to manage regulatory demands. Otherwise, alternative funding options like private equity or venture capital may be more appropriate until they achieve greater stability.
How Merchant Bankers Ensure IPO Success and Challenges They Face
Merchant bankers (BRLMs) are pivotal in orchestrating a successful IPO. They ensure success by:
Due Diligence: Conducting thorough financial, legal, and operational audits to ensure compliance with SEBI guidelines and build investor trust.
Valuation and Pricing: Setting a realistic price band through detailed financial analysis and market benchmarking to attract investors while maximizing capital raised.
Marketing and Roadshows: Coordinating investor outreach to generate demand, particularly from institutional investors like QIBs (Qualified Institutional Buyers).
Book-Building Management: Overseeing the bidding process to achieve optimal subscription levels and share allocation.
Risk Mitigation: Identifying market risks (e.g., unfavorable conditions) and advising on strategic timing to launch the IPO.
However, merchant bankers face significant challenges:
Regulatory Hurdles: Navigating SEBI’s complex approval process and ensuring compliance with evolving regulations can be time-consuming.
Market Timing: Unpredictable market conditions, such as volatility or competing IPOs, can affect subscription rates, especially for SMEs.
Investor Sentiment: Convincing investors about the company’s growth potential, especially for lesser-known firms, requires robust marketing and credibility-building efforts.
Underwriting Risks: If an IPO is undersubscribed, merchant bankers (as underwriters) may have to purchase unsold shares, exposing them to financial risk.
Coordination Complexity: Managing multiple intermediaries (registrars, legal counsel, auditors) while aligning with the company’s objectives demands exceptional coordination.
To overcome these, experienced merchant bankers leverage their industry expertise, networks, and market insights to time the IPO strategically and present a compelling investment case.
Long-Term Impact of IPOs on Company Growth
An IPO can significantly influence a company’s growth trajectory, with both positive and negative implications:
Positive Impacts:
Access to Capital: Funds raised enable expansion, R&D, debt reduction, or acquisitions, fueling long-term growth. For example, companies like Delhivery used IPO proceeds to strengthen logistics networks.
Enhanced Credibility: Listing on exchanges like NSE/BSE boosts brand visibility, attracting customers, partners, and talent.
Future Fundraising: Public companies can raise additional capital through follow-on offerings (FPOs) at lower costs.
Market Discipline: Public scrutiny enforces better governance, transparency, and operational efficiency, fostering sustainable growth.
Negative Impacts:
Increased Costs: Ongoing compliance and reporting requirements can strain resources, particularly for smaller firms.
Pressure for Performance: Quarterly earnings expectations may divert focus from long-term innovation to short-term profitability.
Risk of Delisting: If a company fails to sustain performance or faces market challenges, it risks delisting, as seen in some high-profile IPO failures globally.
In India, the IPO market has been robust, with 2024 seeing significant activity driven by domestic retail and institutional investors. Successful IPOs, like those of Adani пооб Wilmar or Aether Industries, demonstrate how public funding can accelerate growth, but companies must maintain strategic focus and operational excellence to sustain long-term benefits.