In the recent years, the IPO-route has proved to be a huge success for a large number of SMEs in India. In 2016-17 alone, as many as 80 companies came out with their IPOs (initial public offering) and raised a staggering amount of 811 Crores INR as compared to 46 companies garnering 304 Crores INR in 2015-16 through IPOs. The positively affected sectors include media and entertainment, real estate, finance, manufacturing, agriculture and food processing, IT & ITeS etc. This remarkable shift could be attributed to the reform initiatives introduced by the government and regulatory bodies like SEBI and the SME platforms launched by BSE and NSE through which these IPOs were given effect to. (1)
With the advantages emanating from IPO and the availability of suitable platforms, it becomes worthwhile for SMEs aiming for growth and expansion to consider the option of the public offering. In this article, we’ll try to present a quick and a general overview of how SMEs can raise funds from public offering (IPO) so that the readers can have a rough idea about the IPO process.
Advance Planning
Advance planning is crucial for the success of an IPO. Firstly, it is very important for SME owners to acquaint themselves with the rules, regulations, and process of IPO as laid down by the concerned governing body. This will help them reduce the chances of procedural hiccups. Secondly, it is important for a business entity to build the right management team who could not only see through the IPO process but also handle the affairs of the company when it turns public. Similarly, there are other important things like the improvement of business processes, PR and investor relations, financial reporting and compliance, record management etc which a business could plan and streamline in advance as a part of paving its way to IPO.
It is very important for SME owners to acquaint themselves with the rules, regulations, and process of IPO as laid down by the concerned governing body
To read more on how a business can prepare for IPO, click here ‘10 ways to get IPO ready’
Appointment of Underwriters
An underwriter is usually an investment bank who looks after the administration of the IPO process for its client. In exchange for its services, these investment banks charge underwriting fees or a commission when the shares are sold. Some of the critical tasks executed by underwriters include assessment of the financial management of a company, ascertaining the financial requirements and amount of capital to be raised, types of securities to be issued, preparation of the documents to be submitted to the concerned regulatory body etc. (2)
An underwriter is usually an investment bank who looks after the administration of the IPO process for its client. In exchange for its services, these investment banks charge underwriting fees or a commission when the shares are sold
Filing with the Regulatory Body
Next, the underwriter(s) and the company, working together, file the registration statement with the concerned regulatory body. In India, the regulatory body for the securities market is SEBI. The registration statement comprises of all the necessary information and details pertaining to a company such as its management body, financial statements and reports, various compliance reports, capital requirements and planned use of the capital to be raised etc. The regulatory body then investigates this information for its accuracy and authenticity to determine the eligibility of the company for IPO. It also ensures if all the required information has been disclosed and nothing material has been concealed. (3)
The regulatory body then investigates this information for its accuracy and authenticity to determine the eligibility of the company for IPO. It also ensures if all the required information has been disclosed and nothing material has been concealed.
Red Herring Prospectus
In general English, the word ‘red herring’ is used to connote something distracting or misleading. However, in the securities market, the red herring prospectus is a preliminary document issued by a company to the potential investors to generate the latter’s interest for the IPO and it can neither be distracting nor misleading. The purpose of a red herring prospectus is to attract investors for the IPO but it does not include the offer price of the securities, quantum of securities to be issued and the effective date. A red herring prospectus is not the final prospectus and is subject to changes. (4)
The purpose of a red herring prospectus is to attract investors for the IPO but it does not include the offer price of the securities, quantum of securities to be issued and the effective date
Pricing Decisions and Effective Date
After investigation and scrutiny of the information provided by a company in its registration statement and upon satisfaction, the concerned regulatory body approves the IPO. After allocation of the effective date, the company and its underwriters decide on the offer price of the securities and the shares are finally sold on the stock market.
After allocation of the effective date, the company and its underwriters decide on the offer price of the securities and the shares are finally sold on the stock market
Capital is critical for business growth and expansion. The bigger the business goals and ambitions are, the larger will be the requirement for investments. And to infuse larger investment, businesses must consider bigger resource options like IPO.
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YRC is an “Expert Service Division” of Mind-A-Mend Consultancy Pvt. Ltd.
Author Bio
Varun Shah
Chief Finance Officer
