What Are IPOs? How Does IPO Works?
An initial public offering (IPO) is the procedure of releasing fresh shares of stock to the public for the first time in a private firm. A company can raise equity funding from the general public through an IPO. Since there is often a share premium for present private investors, the transition from a private to a public firm can be a crucial period for private investors to completely realise rewards from their investment.
In other words, An unlisted firm can become listed on a stock exchange by issuing its securities or shares on the primary market through a procedure called an initial public offering (IPO). A firm’s existing operations can be expanded, new initiatives can be established, or any other aim mentioned by the company in its offer document can be achieved through an initial public offering. It can just be a straightforward offer to list the company’s existing equity shares while diluting the interest of current equity shareholders. Before an IPO, a company may have very few stockholders. Founders, angel investors, and venture capitalists are a few examples. The company offers its shares to the general public during an IPO. As an investor, you can acquire shares directly from the company to join as a shareholder. Through an IPO, companies can raise equity capital by issuing new shares to the public, or they can raise equity capital by selling existing shareholders’ shares to the public.
A company that sells shares to the general public is not obligated to give the money back to the investors. Investment banks provide support to the issuer (the company that issues shares). The company’s shares trade on the open market after an IPO. These shares can be sold by investors through secondary market deals.
If you are a knowledgeable investor, investing in IPOs may be a wise decision. But not every impending IPO is a fantastic chance. Benefits and dangers are mutually exclusive. It’s crucial to comprehend the fundamentals before jumping on the bandwagon.
Different Types of IPO
There are two typical IPO kinds. As follows:
- Fixed Price Offering
The issue price that some company fix for the initial selling of their shares is known as a fixed price initial public offering (IPO). The price of the stocks that the company decides to make publicly available is disclosed to the investors.
Once the issue is resolved, the market’s demand for the stocks can be determined. If investors participate in this IPO, they must make sure they apply for the shares at the full price.
- Book Building Offering
In the event of book building, the company launching the IPO offers the investors a 20% price band on the equities. Before the final price is established, interested investors place bids on the shares. Here, the investors must state the number of shares they plan to purchase as well as the price per share they are willing to pay.
The term “floor price” refers to the share price that is the lowest, and “cap price” refers to the highest share price. Investor bids ultimately determine the price at which shares will be sold.
Why opt For IPOs?
- Raising Finance
A cost-effective way to raise funds is through an IPO. Shareholders, investors, and venture capitalists provide funding for a privately owned company’s operations and growth strategies. Even though this can help a business get off the ground, there are times when it needs to scale up operations or increase the range of services/products it offers to be competitive, which calls for a substantial infusion of cash.
The company has two main alternatives if existing investors or owners are unable to achieve the required sum: seek a loan or issue new shares. If a business has assets, it may be able to obtain loans with ease, but the interest rates on those loans could hurt its finances and make profitability difficult. The corporation can more affordably meet its capital requirements by going public.
profitability and availability of capital for existing shareholders. A small group of investors contribute money to start a private company. The shareholders start to make money as the business grows and adds customers. However, until the company becomes public, its goodwill in the market and brand value cannot be harnessed. When a corporation issues shares, how investors see the company’s performance determines the market value of those shares.
Therefore, existing owners should expect to receive higher returns on their shares if the company has a significant presence and appealing brand image. Additionally, these companies’ shares trade in large volumes, increasing liquidity.
- Boosts The Credibility Of The Company
India’s stock market is governed by the Securities and Exchange Board of India (SEBI), which has strict standards for businesses looking to go public. Investors can feel secure knowing that a company has complied with SEBI standards and is a solid corporation if it is conducting an IPO. This increases its overall credibility.
The market price of a stock is determined by its supply and demand. Therefore, the former has a higher market value if a company’s stock sells for INR 1,000 while its competitor’s stock sells for INR 350. As a result, the business is better equipped to recruit qualified employees and facilitate successful mergers and acquisitions.
- Market Presence
IPOs are introduced each month. In many cases, investors are unaware of the company issuing the IPO and only become aware of it during the launch time. Investors start researching the firm, looking at its operations, finances, etc. while the company advertises and promotes its first public offering. The company’s market presence is enhanced as a result. Businesses can also use this buzz to grow their customer base.
List of Upcoming IPOs in September 2022 (data as of 04/09/2022)
| Issuer Company | Open | Close | Lot Size | Issue Price (Rs) | Issue Size (Rs Cr) |
| Harsha Engineers Ltd IPO | 14/09/2022 | 16/09/2022 | 45 | 314 to 330 | 755.00 |
| Tamilnad Mercantil Bank Limited IPO | 05/09/2022 | 07/09/2022 | 28 | 525 | 831.60 |
Why Should You Invest in IPO?
The major advantage of initial public offerings is the public’s ability to purchase company shares. This is appealing for numerous reasons. It can provide the opportunity to gain access to a profitable company that would otherwise be close to you. Typically, there is no cost to acquire IPO shares.
This is due to the fact that underwriters are responsible for their distribution and do not charge the companies they work with for this service (unlike with standard stocks where brokers do charge fees). Access to all information about the company and industry is a further advantage. IPO buyers get immediate access to all publicly available and material non-public information about a firm (MNPI).
Lastly, there is a time limit on when IPO shares can be sold. With a typical stock offering, you can swap your shares at any moment after purchasing them, even months or years later. Institutions invest in IPO securities for two reasons. First, they are offered at a price that looks to be discounted since not all assets have been properly appraised. Second, investors are attracted to the notion of investing in something “fresh” and “hot.” A hot new stock can energize investors and make them feel as though they are a part of something exclusive that others will also want to invest in.
Advantages of An IPO
- Public Listing
One of the advantages of investing in an IPO is profit on the day of listing. The valuation of a company’s stock and the offer price is included in the prospectus. An investor may submit a request for a certain number of shares at that price. If the share price on the day of the listing is higher than the price paid for the IPO, this is known as the listing gain.
- Liquidity
When a company becomes public, investors can sell their stock on the open market. This permits investors to realise profits prior to the buyback of their shares. Since investors can buy and sell equities at any moment, their liquidity is increased.
- IPO Norms
The markets for initial public offerings are secure and professional, protecting retail investors. The prospectus for the company contains all pertinent information, including performance, financials, growth, risks, and future goals. Therefore, investors have sufficient information to decide whether to invest in an IPO.
- Transparency
Anyone who invests in an IPO and receives a share allocation becomes a shareholder of the company. The proprietors of the company ensure that their investors remain invested. In addition, the company intends to accomplish its objectives and attain the profit levels promised to investors and analysts. The stock price will rise or fall based on the performance of the company.
- Economical
SEBI has created an IPO application that supports block quantities. This application ensures that funds are deducted from your account only when shares have been allocated. The funds continue to accrue interest until the day of allocation. On the secondary market, however, the sum is promptly debited after the purchase of shares.
- Shareholder’s Right
When you invest in a firm, you acquire the ability to vote at its general meetings. For instance, the company in which you have invested announces at its annual general meeting that it would expand operations in order to boost profitability. You have the right to vote against such a decision as a shareholder.
- Discounted Price
Especially when investing in a tiny company with the potential to grow rapidly, the IPO price is frequently the lowest. This is due to the fact that the corporation discounts its shares. As a result, you can take advantage of a public offering of shares (IPO) because it may become difficult to acquire shares as their values rise.
Disadvantages of an IPO
- Uncertainty
Receiving shares is not assured, which is one of the drawbacks of an IPO. If the shares are subject to subscription, anyone can submit an application for them. Moreover, the company will divide shares proportionally. It will be difficult for small retail investors to purchase shares through the Pre-IPO process.
- Price
When investing in pre-public offering (pre-IPO) shares, there is a possibility that you will receive less than you invested. Only after the listing is the pre-IPO share price determined. There is a possibility that the quoted price will be lower than the buying price.
- Time Consuming
IPO necessitates a comprehensive examination of the company’s prior performance. The company’s prospectus is available for perusal, but its comprehension is arduous and time-consuming.
- Privacy
In order to apply for an IPO, you must submit a substantial amount of information, either on paper or via an online application. It contains information that you may not wish to share. You are needed to supply the same, though.
Terms Related to IPO
To have an informed understanding of an initial public offering (IPO), it is vital to becoming familiar with the process’s core terminologies. Among the most typical terms is
- Issuer
An issuer is a firm or organisation that desires to offer shares on the secondary market to finance its activities.
- Underwriter
A banker, financial institution, merchant banker, or broker may serve as an underwriter. It aids the company in underwriting its stocks. The underwriters additionally agree to purchase the remaining shares if the initial public offering (IPO) shares are not purchased by investors.
- Draft Red Herring Prospectus
After SEBI approval, the DRHP is the document that informs the public about the company’s IPO listing. A DRHP comprises the following company-specific details:
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- Fundraising objectives through listing
- Financial statement
- Promotional costs
- Profit and loss statements for the past three years (if applicable)
- The net income of the company
- Commissions and discounts paid by the insurer
- The names and addresses of all underwriters, officers, directors, and stockholders who own at least 10 per cent of the outstanding shares.
- legal analysis of the listings
- A copy of the underwriting document
- Under and Over Subscription
Undersubscription occurs when the number of securities requested is less than the number of shares offered to the public. When the number of shares supplied to the public is less than the number of shares requested, there is an oversubscription.
- Green Shoe Option
Green shoe refers to an option for overallotment. It is an underwriting agreement that allows the underwriter to sell more shares than the company originally intended. Typically, this occurs when the demand for a share is higher than anticipated. In the event of oversubscription, the issuer can release extra shares on the secondary market.
- Book Building
It is the process by which an underwriter or merchant banker attempts to identify the price at which the IPO will be launched. The underwriter creates a book including institutional investors’ and fund managers’ bids for the number of shares and the price they are willing to pay. The underwriter or merchant banker determines the IPO price after an idea has been conceived and a price band has been established. The shares of the issuer company are available for subscription for three trading days.
Conclusion
The initial public offering (IPO) procedure is lengthy and complex. However, if you have invested in a company with growth potential, your investments will expand along with the company. Additionally, the performance of an IPO is entirely dependent on the market conditions on a given day. Even global issues can influence the likelihood of listing gains. However, before entering the market, a thorough analysis and background check of the company is necessary. Additionally, investors should not be swayed by the benefits of investing in IPOs; they must evaluate all relevant criteria.
FAQs
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Is it Mandatory to have Pan Card for an IPO?
Yes, a PAN number is required to apply for an IPO. After filling out the application form, investors must double-check the PAN, since any inaccuracy in the PAN might result in the cancellation of the application.
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Is it possible to apply for an IPO through multiple applications on the same name?
No. You cannot submit several applications with the same name to an IPO. If an investor attempts to do so, all applications submitted under the same name will be denied. This can also be accomplished by applying under the names of multiple family members. Remember that the candidate must own a Demat account and a PAN.
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