The IPO process is where a new private company lists itself in either the national stock exchange (NSE) or the Bombay stock exchange (BSE) to raise the funds from the public. By this process, a private company can increase its market capitalization by converting itself into a public company.
Once the company gets listed in NSE or BSE, public investors can invest their money to buy the shares of the company. Investors can buy shares with the help of any online trading app. More the public investors invest in a company, the more profitable it becomes.
Why is the IPO process required for a new company?
IPO is a required process for a company to expand more. Before the IPO process, many private investors invest in any particular company. But then there comes a stage where the private investor cannot raise enough amounts for the company. Or we can say the growth of the company stuck there. In that case, IPO can be helpful as it displays the company to tons of public investors.
IPO process raises a good amount for the new private companies thus, the previous loans can be defrayed easily.
Stages to go through IPO process
There are mainly seven stages for a company to go through the IPO process.
- The hiring of an investment bank
Investment banks act as a bridge between the new company and public investors. Companies hire those investment banks which have a larger network of public investors. These investors give the money to the bank and the bank invests that money in a company.
In this way, an investment bank helps the company to raise more funds for a profitable future.
- Due Diligence
In this step, the investment bank performs underwriting for the company. It can be of three types.
- Firm commitments- In this underwriting investment bank invests the money and takes the responsibility for the loss as well as profit.
- Efforts commitments- Under this commitment the bank does not take responsibility for any kind of loss during the shares enrollment.
- Syndicate commitment- In this commitment, the investment bank hires several other small merchant banks to invest the money. This is usually for large fundraising cases.
All the details of the company are filled under the red herring prospectus by the investment bank.
In this stage, all the pricing will be discussed between the investment bank and the listed company. From a valuation of money to share prizes and lot prizes everything comes under this stage.
As the name suggests now, the distribution of shares started by the investment bank and a listed company. Share got distributed among investors and buyers.
Whosoever investor or buyer wants to invest in company share, will start the application process.
- Shares allotment
After that, the shares are being allotted to different investors and buyers.
- Listing on NSE or BSE
This is the final step for the IPO process. Listing of a company on the stock exchange will take approximately 3-5 days. After that the company becomes public and investors can invest in the company with the help of any online trading app.
This is the basic knowledge about the IPO process. It is a must for a company to grow more in the market. Every successful company once went through the IPO process.