What is IPO? Top 3 Points to remember

What is IPO?

When a company requires money for expansion or research and development etc. they will raise money through various process

1- Money from partners

Companies raise money from partners and issue some portions of shares.

2- Fund from friends and family

Companies can raise funds from friends and family

3- Funds from Venture capitals

Companies should have a proper business plan to go for Venture capital firms. If the company’s plans are good it will investment

4- Funds from private equity firms

5- Fund from the bank

Companies can raise funds from banks using collateral debt. It is a form of debt and the company needs to repay the bank

6- Fund from public

The company can raise funds from the share market. For this, there are many processes included. An IPO allows the company to raise funds from public investors.

IPO – Initial Public Offering

The company offers shares to the public and raises funds from the public. This will happen in the primary market. There are many processes included in the IPO.

Appoint Merchant bank

The company needs to conduct a study to identify whether the company is eligible for the IPO. If they are eligible for IPO the processes will start including underwriting of shares, red herring prospectus, application in SEBI, and marketing of IPO. The merchant bank will help the company in the above processes.

Approval from SEBI

The company needs to submit various documents to get SEBI approval. The merchant bank will help the company to get the SEBI approval

Red Herring Prospectus

Creating a red herring prospectus is the third process in the IPO. Once it is created they need to publish the report to the public. It is similar to the brochure. It includes history, financial statements, Upcoming plans of the company, how much funds they are raising, allocation of the fund, IPO date, IPO lot size, IPO share price, or price range. all information will available in the red herring prospectus.

There are two methods of IPO issuing.

• Fixed Price issue.
• Book building issue.

Fixed price issue

In a fixed price issue, with the help of a merchant bank, the company fixes its IPO price and brings it to the public. So the people can apply for the IPO at the same fixed price.

Book building issue

In this method, you can see a price band. There will not be a fixed price so the public can quote the price of the IPO in that period. Once the IPO period ends the company analyzes that and fixed a cut-off price for the IPO. That will be the final price for the IPO. The people who bid at the same cut-off price or above the cut-off price will get the IPO shares. That [rice will get to the company

In retail investors will give some proposal to buy the IPO shares if the bid price is less than the cut-off price it will allow the investor to get the shares. In a regular retail investors can buy up to 200000 worth of shares.

If you want to but more than that you will move into HNI(high net worth individual) so you can apply for more shares. But the allocation proportion for HNI will be very less compared to retail investors.

In IPO you can buy shares in lot wise in a red herring prospectus containing the details of numbers of shares per lot

After some days of the IPO period, all the above processes will be complete and shares will available in the Demat account of the investor.

There are a few points you need to Understand

Oversubscription

Suppose the company offers 1 lakhs of shares through IPO but they have received more than 2 lakhs applications for shares this is known as oversubscription. In oversubscription, The companies decide on 1 lot per person. some people apply for more than 1 lot, which will reduce to 1 lot per person another way is a lucky draw, the person may get a chance to win and get the shares

Undersusbcription

If the company offers 1 lakh of shares and the number of applications is less then it’s known as under subscription. If the response is less than 90 % then the IPO will get canceled.

Greenshoe option

If the company thinks the IPO is going to oversubscribe then they will allow some other certain portion of shares to the IPO. This will decide early. This will allow more investors to get shares.

What will happens on a listing day?

Once the IPO is Completed the investors will get the shares at the listed price. On a listing day, the shares can sell or buy in the share market. This will happen in the secondary market. The person who bought shares from the company can sell the shares to the other person in this market or the investor can hold the shares. On a listing day first 45 minutes the investors can place or ask for the shares at a particular price. From this, the company’s price will start from a gap up or gap down or a flat price.