The IPO Cycle: Stages, Process, and Impact on Investors

Introduction

What is the IPO Cycle?

When companies need funds for expansion, new projects, or sustaining operations, they explore various financing options. One such method is an Initial Public Offering. IPOs allow a private company to raise capital by offering its shares to the public for the first time in exchange for equity.

The IPO cycle refers to a private company’s structured process to transition into a publicly traded entity. This journey involves several key stages, from initial planning and regulatory approvals to launching shares on the stock market and enabling public trading.

Why Understanding the IPO Process is Important for Investors

Understanding the IPO process helps you evaluate the risks and rewards associated with upcoming IPOs and determine whether they align with your financial goals. It also helps you assess company financials, market trends, and investor demand to identify potential risks such as overvaluation, weak fundamentals, or volatile market conditions before committing your money. Thus, measuring risk factors such as regulatory challenges, pricing fluctuations, and post-listing performance becomes easy.

How Companies Transition from Private to Public Through an IPO

The transition begins with evaluating financial health and hiring investment bankers to handle regulatory approvals and pricing. The company then files a Draft Red Herring Prospectus (DRHP) with SEBI and markets the IPO to attract investors. Once approved, shares are allocated, and trading begins on the stock exchange, officially making the company public.

What is the IPO Cycle?

Definition and Explanation of the IPO Cycle Process

The IPO cycle is the structured process through which a private company offers its shares to the public for the first time. It includes planning, regulatory compliance, pricing, allotment, and post-IPO market performance.

Why Companies Choose to Go Public

Companies opt for an IPO to raise substantial capital for expansion, innovation, or debt repayment. Going public also enhances liquidity, allowing early investors and stakeholders to monetize their shares. Additionally, an IPO boosts brand visibility and credibility, attracting more investors, talent, and business opportunities. With greater financial transparency, publicly traded companies can access future funding and strategic partnerships easily.

Stages of the IPO Cycle

1. Pre-IPO Stage: Company Preparation

Internal Planning: When a Company Decides to Go Public

Before committing to an IPO, companies evaluate their financial health, market conditions, and growth potential. This stage involves internal discussions to assess whether going public aligns with long-term business goals.

Selection of Investment Bankers and Underwriters

To facilitate the IPO, companies hire investment bankers and underwriters who analyze market trends, structure the offering, and ensure compliance with regulatory requirements. They also help determine the IPO pricing strategy and manage risk.

Drafting the Red Herring Prospectus (RHP) and SEBI Approval

The company and its underwriters prepare a draft of the Red Herring Prospectus (RHP). It is a document that details financials, risks, and objectives and which is later submitted to SEBI for approval.

2. IPO Registration and Compliance Stage

Filing the DRHP (Draft Red Herring Prospectus) and SEBI Review

A Draft Red Herring Prospectus (DRHP) is submitted to SEBI, providing detailed insights into the company’s financials and IPO structure. SEBI reviews it to ensure transparency and investor protection.

Regulatory Approvals and Market Analysis

Once SEBI approves the DRHP, the company analyzes market demand and economic conditions before finalizing the IPO date and pricing structure.

Roadshows and Marketing the IPO to investors

To generate investor interest, companies conduct roadshows- presentations held across key financial hubs to showcase growth prospects and attract institutional and retail investors.

3. IPO Pricing and Subscription Phase

Book-Building vs. Fixed Price IPOs

Companies choose then between two pricing methods:

• Book-Building IPO: Investors bid within a price range, and the final price is set based on demand.
• Fixed Price IPO: The company sets A predetermined price before the IPO launch.

How the IPO Subscription Process Works

The IPO subscription period begins on the announced opening date and usually lasts for 3 to 5 trading days. During the subscription period, investors can apply for shares through authorized stock exchanges, brokers, or online trading platforms. Applications can be placed under different investor categories, such as retail investors, qualified institutional buyers (QIBs), and high-net-worth individuals (HNIs).

If the IPO receives more applications than the number of available shares (oversubscription), allotment is done based on predefined rules:

• Retail investors: A lottery system usually determines allotment if the IPO is highly oversubscribed. This ensures a fair distribution of shares.
• Institutional investors & HNIs: These investors may receive proportionate allotment based on bidding quantity and demand.

For undersubscribed IPOs (where demand is lower than available shares), all investors who applied receive full allotment of the closed IPOs. The issuer may withdraw or revise the offer if an IPO remains significantly undersubscribed.

Factors That Determine the Final Issue Price

In the Fixed Price Method, the company pre-determines the price before the IPO launch in consultation with its underwriters. This method fixes the price beforehand after factoring in the market conditions, company valuation, and investor sentiment.

In the Book-Building Method, the final price is determined after analyzing demand and set at the level where the maximum number of shares can be allotted. Here, investor demand plays a crucial role, along with broader market trends and the company’s financial performance, which help determine the final price point.

4. IPO Allotment and Listing Process

How IPO Shares Are Allocated to Investors

Shares are distributed among different investor categories- retail investors, institutional buyers, and high-net-worth individuals- based on predefined allotment ratios, regulatory standards, and subscription levels. For instance, as per SEBI regulations, in a Mainboard IPO (IPO offered by a large company), at least 35% of shares are reserved for retail investors, 50% for Qualified Institutional Buyers (QIBs), and 15% for Non-Institutional Investors (HNIs).

Understanding IPO Listing Day and Market Reactions

On listing day, shares begin trading on the stock exchange. Based on market sentiment, investor confidence, and overall demand, prices may surge, stabilize, or drop. 

5. Post-IPO Phase: Life After Listing

Lock-In Periods for Promoters and Institutional Investors

Certain investors (such as promoters and institutional buyers) face a lock-in period to prevent immediate selling, restricting them from offloading shares for a specified duration.

Stock Volatility and Market Performance After IPO

After listing, stock prices may fluctuate due to market trends, economic factors, and investor sentiment. Some stocks stabilize, while others experience high volatility.

How IPOs Transition Into Publicly Traded Companies

Once public, companies must comply with stock exchange regulations, provide regular financial disclosures, and focus on sustaining investor confidence for long-term growth.

Real-World IPO Cycle Examples

1. Case Study: A Successful IPO Cycle

JSW Infrastructure, a leading private-sector infrastructure company and part of the JSW Group, completed its IPO in September 2023. The issue price was set at Rs.113-119 per share, and strong investor demand led to 39.36 times oversubscription. The stock opened at a 20% premium on the listing day, reflecting strong market confidence.

The company started with thorough planning and regulatory approvals and secured SEBI clearance. Then, investor outreach through roadshows generated interest, leading to high demand during the subscription phase. The final listing saw strong participation from institutional and retail investors.

Several factors contributed to this success. The company had a strong financial track record and a clear business model, and it operated in a high-growth sector. The IPO was priced attractively, encouraging broad investor participation. Each stage of the IPO cycle was executed efficiently, ensuring a smooth transition from a private company to a publicly traded one.

2. Case Study: An IPO That Struggled After Listing

Paytm launched its IPO in November 2021, aiming to raise Rs.18,300 crore at an issue price of Rs.2,150 per share. The IPO was oversubscribed, but the stock fell 27% on its listing day, erasing a significant portion of its market value. During the IPO process, regulatory approvals were secured, and investor demand was assessed. 

However, concerns arose regarding valuation, as analysts questioned whether the pricing was justified given the company’s financial performance. Investors found the business model complex, making it challenging to evaluate long-term growth. Regulatory scrutiny added uncertainty, and market volatility at the time impacted overall sentiment. Hence, despite strong demand during the subscription phase, post-listing performance was affected by these factors, leading to a decline in stock value.

3. What These IPO Cycles Teach Us About Market Trends

The contrasting outcomes of JSW Infrastructure and Paytm’s IPOs highlight key trends in the public listing process. Companies with strong financial performance, clear business models, and realistic valuations tend to attract sustained investor confidence. JSW Infrastructure’s success demonstrates how careful planning, sector growth potential, and strategic pricing can contribute to a well-received IPO.

On the other hand, Paytm’s experience underscores the risks of high valuations without corresponding profitability, regulatory uncertainties, and market timing challenges. Even with high initial demand, an IPO can struggle post-listing if investors have concerns about the company’s long-term growth and financial health.

These examples show that a well-structured IPO goes beyond securing subscriptions. Market conditions, investor sentiment, and company fundamentals all play a role in determining how a stock performs after listing.

Common Challenges Faced During the IPO Cycle

1. Regulatory Hurdles and Compliance Delays

Companies must secure SEBI approval by submitting the Draft Red Herring Prospectus (DRHP). If documents need revisions or compliance issues arise, the approval process can take longer, delaying the IPO timeline. Sector-specific regulations and foreign investment rules can further add to the complexity.

2. Market Volatility Impacting IPO Pricing

Stock market fluctuations can affect investor confidence and IPO pricing. A downturn or uncertain conditions may lead companies to adjust their price bands or delay the listing. High volatility can also reduce participation from institutional and retail investors.

3. Oversubscription and Under-Subscription Risks

Oversubscription means high demand, but not all investors get shares, increasing post-listing volatility. Conversely, under-subscription signals low investor interest, forcing companies to lower the issue price, extend the subscription period, or even withdraw the IPO.

Conclusion

Takeaways on the IPO Cycle and Its Importance

The IPO cycle helps you understand how companies go public and what factors influence success so you can perfect your research when analyzing the opportunities thoroughly. A well-executed IPO signals strong financial health and growth potential, while challenges may indicate risks.

How Investors Can Use the IPO Cycle to Make Informed Decisions

Staying updated on market conditions, regulatory changes, and IPO subscription data helps you make informed investment choices. Tracking past IPO performances reveals patterns in pricing, demand, and post-listing trends. Additionally, you can leverage stock market advisory insights for a deeper analysis of upcoming IPOs and company fundamentals to assess potential opportunities and risks.

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