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Basics of stock market 4: Company filing for the IPO process


Now you understood why a company wants to get listed in the stock market or the exchange. At this stage, your only with a registered company running an amazing business. You know to get listed is a dream come true but have no idea how to get listed. Whom should you ask and what are the processes to get listed in the stock market? Let's dive deep into the process of a company filing to get listed in the exchanges.

A company makes an offer (generally in crores) to the people through exchanges, this is called Initial Public Offer or IPO. We often get IPO alerts if you have a trading account, or you must have read in newspapers that a company is coming up with IPO. Remember, when they say about IPO, it means the company is gearing up to be listed in the exchanges- the stock market.

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Merchant Banker

The first and foremost step would be to appoint a merchant banker. Merchant bankers are also called Book Running Lead Manager (BRLM) or simply Lead Manager (LM). Their role is to assist the company with various aspects of the IPO process. In case it’s a large company, they usually hire 2 merchant bankers.

Regulations for merchant Banker

merchant banker

Merchant bankers are required for dealing in international markets for procuring financial help and incorporating business and trading in the international market. The SEBI or Securities and Exchange Board of India is the regulatory authority for Merchant Banking in India. The law which regulates the activities of the Merchant Bank in India is the SEBI (Merchant Bankers) Regulations 1992.

Banking Institutions performing merchant banking activities are also required to follow the requirements laid down in the prudential exposure norms prescribed by the Reserve Bank of India.

Examples of Merchant Bankers in India

  • Public Sector: SBI Capital Markets, Punjab National bank, IFCI Financial Services, Bank of Maharashtra

  • Private Sector: ICICI Securities, Axis Bank, Bajaj Capital, Tata Capital Markets, Kotak Mahindra Capital Company, Reliance Securities, Yes Bank

  • Foreign Merchant Banker: Goldman Sachs (India) Securities, Morgan Stanley India, Barclays Securities (India), Bank of America, Citigroup Global Markets India.

These are the qualities a company see while selecting a merchant banker:

  • The reputation of the Bank: Is the bank a reputed bank in the country, has it been running for a long time, does the public have a good opinion about the bank.

  • Quality of Research: This is very important, as this determines how strong the bank is. The quality of research determines how strong and qualified the bank is for future operations.

  • Industry expertise: This relates to the industry the company is in as well as the bank is in. The more experienced (years in the industry) creates confidence in the company.

  • Distribution: Does the company has influence over Domestic Institutional Investors to issue securities. And, to large individual investors as well.

  • Past relationship with the bank: If the company has a prior relationship relating to its financial or operational activities, it shows a strong interest in choosing the bank.


Underwriting is a service offered by the merchant banker whereby they guarantee payment in case of financial loss or damage and accept the financial risk for liability arising from such guarantee. They raise the investment capital on behalf of the company. The merchant banker underwrites the transaction, which means they have taken on the risk of distribution of the securities (shares).

There are 4 agreements where the merchant bank takes in order to sell the shares through the IPO.

  • Firm Commitment: Here the bank purchases the whole offer and resells the share to the investing public in IPO. There is a firm commitment by the bank that a certain amount of money will be raised through the IPO. The bank takes a risk here that if the whole offer is not sold out, the bank itself would have to buy the remaining offer.

  • Best Effort Agreement: Here the bank does not purchase the offer but puts in the effort to sell the shares to the investing public. The bank here does not take any risk of selling the entire offer. It only sells the securities (shares) on behalf of the company.

  • Syndicate of Bankers: Here, instead of one there will be multiple merchant bankers. The main banker will be called lead book-running manager and the rest will be book-running managers. The risk will also be shared. These banks will again form strategic alliances with other banks to sell a part of the IPO.

  • All or none agreement: Here the bank comes into an agreement that, if all the offer is sold, then only the banks will act as merchant bankers and the offer will be valid. If in any case, the offer is not sold, the whole IPO will be canceled.

Underwriters make their income from the price difference (called "underwriting spread") between the price they pay the issuer (company) and what they collect from investors (IPO) or from broker-dealers who buy portions of the offering.

Application to SEBI


You would have to apply to SEBI for the IPO. The registration statement contains details on what the company does, why the company plans to go public, and the financial health of the company. SEBI has mandated the following criteria based on the company's profitability for the issue of an IPO.

  • The company should have at least Rs 3 crore in net tangible assets in each of the previous three years. Out of this 3-crore amount, not more than 50% should be cash or cash equivalent like money in an account, cash receivable, or investment accounts.

  • The company should have a net worth of at least one crore rupees in each of the previous three years.

  • The company should have an average operating profit of at least fifteen crore rupees (pre-tax) in each of any three years among the previous 5 years.

  • If the company has taken a new name, then 50% of the total revenue earned in the previous year should have come from the activity performed by the company after assuming the new name.

  • The total value of the issue size of the IPO by the company should not be more than 5 times the net worth of the company before the issue of the IPO.

Once SEBI receives the registration statement, SEBI takes a call on whether to issue a go-ahead to the IPO.

Draft Red Hearing Prospectus (DRHP)

Once the company gets a nod from SEBI, the company starts preparing DRHP. This is the preliminary registration document prepared by the merchant bankers that gets circulated to the public. The merchant banker takes care of the legal compliance issues and ensures that prospective investors are aware and kept in the loop of public issues.

Along with a lot of information, a DRHP document must contain the following:

  • The estimated size of IPO

  • The estimated number of shares being offered to the public

  • Why the company wants to go public and how does the company plan to utilize the funds.

  • Projected timeline of how the company is going to use the IPO finds

  • A business description of revenue model, expenditure details, and complete financial statement

  • How the company is planning for its future operations, can be part of management discussion and analysis

  • Management details and their background

  • The risk involved in the business

After the application has been submitted, SEBI has the right to reject the Draft Red Herring Prospectus if:

  • No one knows who the ultimate promoters of the company applying for the IPO are.

  • The company is collecting funds for a purpose that is not clear to SEBI or mentioned in the DRHP report.

  • The issuer's business model is exaggerated, complex, or deceptive, and investors cannot determine the risks associated with it. This also makes it difficult to predict the risks associated with the company's future.

  • A litigation concerning the company is going on, and the outcome of the litigation will judge the company's future existence.

Marketing the IPO

This is really important. You need to tell people that your company is going for an IPO. Give the hype to people about your company and its management. You can do this through traditional marketing ways like taking prints, broadcast, telemarketing, direct mail, window displays, signs, etc. Also, you can spread the info through digital marketing like advertising in search engines, websites, social media platforms, emails, mobile apps, influencer marketing, etc.

Deciding the price band

Deciding the price on which the company will go public is a major criterion. Companies and Merchant bankers do a lot of market research and analysis before they decide the appropriate price for the IPO. If the price is too high, then people perceive it as very high and will not buy. So, shares will not sell off on IPO. If the price is too low, the company will become too much undervalued, thereby decreasing its valuation. So, the merchant banker has to decide and fix a competitive as well as decent price band where the Investors might be willing to buy.

Fixing the price

There are two types by which the Merchant banker can fix the price:

Fix price Issue

After evaluating the company's assets, liabilities, and every financial aspect, they fix a price for their offerings. The price is fixed after considering all these factors including qualitative and quantitative factors. In a fixed price issue, the fixed price may be undervalued during the company’s IPO, bringing the price lower than the market value. As a result, investors are always very interested in fixed price issues and ultimately revalue the company positively.

Book Building Issue

In this type, there isn’t any fixed price. The prices will be in a range and the public can choose a price that they think is fair enough for the IPO issue. The lowest and the highest price is called ‘floor price’ and ‘cap price’ respectively. The process of collecting all these price points along with the respective quantities is called book building. Only after the book-building process is closed (closure of IPO subscription), the price points at which the issue gets listed is fixed. The price point is usually the price at which the maximum bids have been received.

Difference between Fixed price issue and Book building issue

  • In case of a fixed price issue, the price is fixed from day one and is printed on the prospectus document (DRHP). In the book building issue, the price band is fixed initially, and only after the closing date, the exact price point is fixed.

  • The demand for fixed price issues is known only after the closure of the IPO, whereas demand for book building issues is known after each day.

  • In a fixed price issue, you will have to pay 100%o the issue price at the time of bidding. In the case of book building, payment can be completed after the allotment.

Listing Day


Now you got all your documents ready, got the nod from SEBI and RBI, merchant banker helped you to make the DHRP document and got through the book-building process. Now you have arrived at your listing price as well. Now, you’re all set for the listing day. The day your company is getting listed in the stock market!

In the next article, we’ll see what happens once you get listed in the stock market. How do you evaluate your subscriptions (number of people who brought your company share)? From where do investors apply and bid for IPO? Who keeps the money when you subscribe to an IPO?

Stay tuned!



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