All about IPO 💰

Let’s start with the classic definition 😉
An initial public offering or IPO refers to the process of offering shares of a private company to the public through the stock market with the primary purpose of raising capital. If you’re not familiar with the basics of stocks and the stock market then I’ll suggest you go through this https://groww.in/p/stock-market-basics/ before reading further.

The reason why it’s called an initial public offer is that the company is offering the shares for the first time to the public. The public subscribes or buys the shares now from such companies by paying a certain price. Before going public, every private company has a relatively small number of shareholders like the founders, family or friends, and some professional investors like angel investors & venture capitalists. So every stakeholder has a significant amount of ownership in the business then you must be wondering why promoters decide to sell a part of their ownership to others. 🤔

Primarily any company goes to the public for these main reasons:

1. Raise money needed for their capital expenditure (also known as CAPEX requirement) so that they can increase their production capacity, hire more resources, buy more outlets, invest in advertisement & marketing of the product, etc. to grow their business.
2. Promoters spread their risk amongst a large number of people by selling their shares since every share contains some inherent risk.
3. It also helps in reducing debt which leads to better profitability.
4. Initial investors get the opportunity to sell their shares at a larger price to the public than what they originally bought and book good chunks of profit.
5. Shares can also help in merger and acquisitions of other companies which ultimately increases the reach, widens the customer base and improves the profitability of the organisation.

The IPO Process

Several events happen in the whole process under the guidelines of SEBI.

1. Select a merchant banker or an investment bank🏦
   The merchant banker helps in taking the company public through various activities like conducting due diligence on the company filing for an IPO, going through its legal documents, making marketing strategies for the advertisement, guiding the company in deciding its price band, prepares different listing documents, etc. A company can hire more than one Investment bank if needed.
2. Apply to SEBI
   The corporation now applies to SEBI with a registration document that contains the details about the business, its financial health, the reason for going public, etc. SEBI review the documents and decides whether to go ahead with the IPO or not.
3. Release DRHP
   If the SEBI approves, then DRHP or Draft Red Herring Prospectus is released to the people who are involved with the IPO. It’s a document that contains details about the IPO like the estimated size of the IPO, why the company wants to go public, how are they planning to use that fund, the estimated number of shares they are going to offer, their business model, expenditure details, what are their business plans for the future, the management details and so on.
4. Decide the price & Book Building Issue
   A fixed price (usually called Fixed Price IPO) or a price band is decided by the company for the IPO. If the company issue its shares with a price band then the public bids for those shares at a particular price within the specified band. The process of collecting these share prices along with their respective quantities is called Book Building.
   The shares are usually bought in groups. For example, a lot of 100 shares with a price band of Rs 200–210 per share means that any investor must buy a minimum of 100 shares or 1 lot. The corporation also decides the stock exchange where it is going to list the stocks.
5. IPO is made available to the public
   On the chosen date, the company releases forms and documents to the public. People get those form from any designated banks or broker firms, fill them and pay money either through online or offline mode. An IPO is usually available for 5 working days during which people bid for the shares. The shares are credited to the Demat account.
6. Listing Day
   After the bidding process, the stakeholders & under-writers decide how many shares each investor will receive, those shares are allotted and then the company is finally listed on the stock exchange at a listing price. This listing price is dependent on the demand and supply on that day and also on the price at which maximum bids have been received.

IPO is a part of the primary market where a company sell its stocks and new bonds for the first time to the public. But the moment the stock gets listed on the exchange and started to trade publicly, it becomes a part of the secondary market. IPO is a very costly process for any company since investment banks charge substantial fees for their services and it also requires lots of time & attention from the promoters, management and major stakeholders. A lot of company details doesn’t remain private after this and the business control goes to the board of directors. Hence despite all these disadvantages, many companies go public due to lots of advantages that it offers.

Now you know all about IPO so let’s also understand a few basic terms related to this whole process.

1. An IPO is said to be under-subscribed if the number of bids received during the book-building process is less than the number of shares offered. For example, the number of shares offered was 100 and the number of bids received was 80. It shows that people are not very optimistic about the growth of the company.
2. On the contrary, if the number of bids received is more than the number of shares offered then the IPO is said to be over-subscribed. For example, the number of shares offered was 100 and the number of bids received was 200 (2x over-subscription). It reflects the positive sentiment of the investors.
3. Sometimes during oversubscription, the issuer can authorize more shares which is a part of the underwriting agreement. This is called the greenshoe option or overallotment option.
4. Apart from the floor price (minimum price in the price band) & the cap price (maximum price in the price band), investors also have a third price called cut-off price which means the investor is okay with any price that the company finalizes to offer the shares to subscribers.

Conclusion 😎

There is always excitement in the market during the IPO time but it’s not always necessary that investors will make a profit after the company gets listed on the exchange. Many times, losses have occurred. Hence, everyone should do their due diligence before applying for an IPO. Apart from all the news and media hype, it’s important to go through the company’s prospectus which is shared during the process. This will improve the chance to bid for a good IPO and make some good cash quickly.

Mutual Fund Sahi hai….