Decoding the Mechanics: How does an IPO work?
IPOs can be a great way for companies to raise capital and become more accessible to investors.
The process of going public is difficult and time-consuming. A private company considering an IPO must get ready for escalating levels of public scrutiny. In addition, it must submit a tonne of paperwork and financial reports to satisfy the market regulator's standards, which watch over publicly traded corporations.
By producing important paperwork for investors and setting up meetings with them, underwriters assist management in getting ready for an IPO. A bank, financial institution, merchant bank, or broker are all examples of underwriters. The underwriter distributes shares to investors and the business's stock starts trading on a public stock exchange after the company and its advisers determine an initial price for the IPO.
Why is the Draft Red Herring Prospectus important?
Many businesses have queued up to launch their initial public offerings. One of the most crucial instruments for completely comprehending a corporation is the DRHP. A DRHP offers comprehensive details on the company's financials and commercial activities.
This comprises information about the company's promoters, the reason for the fundraising, the risks involved, the balance sheet, the earnings statement, stockholders who own 10 per cent or more of the stock that is currently issued, a copy of the underwriting agreement, and other things.
Criteria for Filing IPOs
The requirements for firms wanting to register an IPO are as follows.
In each of the previous three years, the firm should have had at least Rs 30 million in net tangible assets (defined as physical assets + monetary assets). This excludes virtual assets with varying values, such as shares. In the previous five years, the business should have generated an operational profit of at least Rs 150 million for at least three of those years.
The size of the IPO cannot be greater than five times the value of the firm. Even if these requirements are not met, the firm may nevertheless submit a request to the watchdog for permission for an IPO. However, in order to obtain these approvals, the IPO may only proceed via the book-building method, which requires that 75 per cent of the shares be sold to qualified institutional investors (QII).
For the sale of stocks under the IPO to be regarded as legitimate, this must be completed. Any funds raised must be refunded if the IPO is not approved. The purpose of the stock market regulator is to safeguard the interests of investors while ensuring that standards aren't excessively onerous so as to deter potential firms from going public.
This concludes part 2 of our IPO series. Part 3 on the topic will be published soon.