Initial public offering (IPO) is a process, which transforms a private company into a public company. By offering the shares of that privately held company to the public for the very first time. This all happens when a privately held company decides to go public. Companies do it all the time to raise more funds and for investors to realize how much they have gained from their prospective investments.

After the process of initial public offering (IPO), public investors can also invest and trade shares of the company. Before the process of IPO a company has very few participants like Founders, Angel investors, and other Venture Capitalists.

What is the meaning of the IPO?

The meaning of the initial public offering (IPO) can be defined as the process, which Transforms a private corporation or a company into a public corporation or company by selling a portion of its shares to the public and other interested investors. After the process, a company gets a new investment and the real value of the shares.

What is the process of IPO?

The process of Initial public offering (IPO) in India is straightforward. There are certain steps which a normal company takes to get their privately held company into the public. Other than being implemented by the government and SEBI, companies also focus on building advertisement strategies so that more and more people can subscribe to their offerings.

Select an underwriter

The first and foremost step for any company which is looking to go public from private is to hire an underwriter. Which is also known as an investment bank. An investment bank or underwriter of a company hire calculates the best initial price per share. Depending on the various factors like how much market cap the company has, how much growth the company is expecting to get in the coming years and how many shares company is thinking to offer to the public.

Creating the Prospectus

The second step for an IPO will be to create a Red herring prospectus. Red herring prospectus is a presentation of the work an investment bank does on its end. As I told you before the underwriter counts everything like market cap, shares offer, risk of the market, expected growth, and other factors. With these data, they try to create a good-looking prospectus to attract potential investors. They all do it to make their initial public offering (IPO) successful.

SEBI Approval Process

Every initial public offering of any company wishing to list in any Indian stock exchange must take approval from Securities and Exchange Board of India (SEBI). The same Red herring prospectus which the underwriter create to attract potential investors is presented to the Securities and Exchange Board of India (SEBI). Other than that company also propose expected dates on which the company is expecting to launch its IPO and allot the shares.

After the proposal to the Securities and Exchange Board of India (SEBI), it is up to the board if they are satisfied with the facts that company presented. SEBI may reject the proposal and ask for the changes. But if everything goes right company is ready for the next step to launch the Initial public offering (IPO).

Approval from Stock Exchange

Now the ball of Initial public offering (IPO) for any company is in the hands of the respective stock exchange in which the company is willing to get listed. Because different stock exchanges have a different set of rules in which they allow a company to get listed on their Stock Exchange. For Example, Bombay Stock Exchange BSE has Rules like Issue size must be 10+ Crores, Company must have 25+ Crores of Market Cap ETC.

Similarly, the National Stock Exchange of India (NSE) or Calcutta Stock Exchange has its own shoes which can be different from other stock exchanges. But they all follow the guidelines issued by the Securities and Exchange Board of India (SEBI).

Subscription of IPO

After all the necessary formalities and approval from various boards and stock exchanges a company is ready to offer is shares to the public. This is a very crucial step for every investor of the company no matter it’s an Angel investor or founder or a public investor which is going to subscribe soon. The subscriptions step decides on how much premium discount share will get listed from its offered price.

Premium price means the initial public offering (IPO) was a success. For example, offered price of the share was 100 rupees and stock gets listed at 110 rupees that mean people were willing to pay 10 rupees as a premium to get the share. Which means there was more demand for the shares the company initially offered.

Similarly discount means that the initial public offering (IPO) was is not a success as it gets listed at the discount price. For example, the same hundred rupees share get listed at 90 rupees after the IPO. Which means subscriber loss 10 rupees per share during the process of IPU as there was not much demand as the company expected before the IPO.

What are the Types of IPO?

Now you must be wondering Are there any types of IPO? Yes, there are types of IPO and it’s TWO. Any company which is willing to go public by offering IPO has 2 options to select from.

First option is taken by most of the companies these days. The company creates a prospectus which they present in front of Securities and Exchange Board of India (SEBI) and other respective exchanges where they wish to get listed. And after that, they made that prospectus public so everybody can see and if they wish to apply they can at the Price company proposed.

After that interest of the general public determines the success or failure of an IPO. And parameter for the judgment is the number of subscribers. This process is called a Fixed price offering.

The second type of IPO is called Book Building Offering. This type of initial public offering is a little bit complicated than the fixed price offering. In this process, investors bid on the shares before the company announces the price of the share. Here the investors have to specify the number of shares they are willing to buy. And also the price they are willing to pay for those shares. The Book building Offering may gain the interest of investors. That is why companies opt for the fixed-price offering.

Benefits of Initial public offering (IPO)

As you all know after reading the previous points the primary objective of any Initial public offering (IPO) is to raise capital for the company but it also comes with different benefits.

  • A company is no longer dependent on the Angel investors and other big houses to get more funds. Which give promoters and Board of directors of the company to raise the capital further more with the help of public.
  • Company gets the idea of real price of per company share and Market Cap. As there are many Investors and hedge funds which are constantly looking for good companies to invest in.
  • The company gain more trust of investors which help them overcome the difficult times.
  • Company can offer more shares to the public with the help of FPO as it already have a Fan base with the IPO.
  • Public companies attract more skilled employees which help the company to get more success.
  • IPOs also create the image of company.Because it create a huge buzz in between the investors companies take this change to advertise its products and services to new set of customers. Which eventually create more business for the company.
  • Some early investors or Angel investors including founders sell their stakes to make money. As the share of company get more liquidity after the IPO so it’s easy for them to exit easily.

Eligibility for the IPO

Initial public offering (IPO) has come eligibility criteria for the inventors depending on the category they fall in. There are three different investing categories in India.

  • Qualified institutional buyers (QIBs)
  • Non institutional investors (NIIs)
  • Retail Individual Investors (RIIs)

The allocation of shares you apply in the IPO depends on the category you fall in. As per the Rules, You and Me fall in the category of Retail Individual Investors (RIIs). For the Retail Individual Investors (RIIs) IPO rules are:

  1. The individual investor who is willing to buy shares in an IPO must have a pan card issued by the income tax department of the country.
  2. The individual investor who is subscribing for the IPO must have a valid demat account attached to his/her PAN card.
  3. Even though it is not required to have a trading account for the retail individual investors who is willing to apply. But in case subscriber who got allotment is willing to sell on the listing day must have a Trading Account.

For the convenience of the investor before applying for the initial public offering (IPO), You must have a Demat account with a broker who has facilities like apply in IPO. ZERODHA is One of the best broken you can go with while applying for an initial public offering (IPO).

How to invest in IPO

As you already know that before applying for the IPO you must have a Demat account. If you don’t have a Demat and Trading account try our recommended broker Link given above.

  • 1st for any investor who is willing to apply in IPO will be to decide on which IPO he should apply. For any experienced investor it may not be the big headache but for a beginner it is. It is always advised to read the prospectus company In front of securities and exchange board of India. To get the idea what the company do and how much they have gained in the past.
  • After deciding on which IPO you are going to apply you should have enough funds before for the subscription. Because when you apply bank hold your money till the subscription is alloted. You may also face loss in IPO that is why it is recommended to apply in it without your own money.
  • After that you can Bid on the shares you are willing to buy. At this step you have to mention both the price on which you are willing to buy the shares and how many shares you are willing to buy. Always remember that companies allot share in a fixed lot size. If you are willing to apply more than fix Lot size then you have to apply like Lot Size * Number of lots you willing to buy.

Allotment process of IPO

As you already know that there are three different categories in which an investor can apply.

  • Qualified institutional buyers (QIBs)
  • Non institutional investors (NIIs)
  • Retail Individual Investors (RIIs)

Every company fixes the number of shares they are willing to allot to each category and mentions that in their Red herring prospectus which they present in front of securities and exchange board of India.

An individual investor’s lot price range is between 10,000-15,000. For example Number of shares(Lot Size) * Offered Price = 10,000-15-000. You can always apply for multiple lots not more than 200,000 in overall value.

And allotment of shares depends on the number of shares offered / Number of shares applied. If the number of shares offered by the company is more than a number of shares public applied. Then investors get full allotment even 200,000 value.

If the number of shares applied by the public surpasses the number of shares offered by the company then a process of Lottery system comes in. Then the shares go through a completely computerized process to ensure fair play. And lottery system allots 1 Lot per pan card first and then decides first come first serve policy.

FAQs

  • What is the Full Form of IPO?

The full form of IPO is an initial public offering.

  • Which was the first ever IPO of Modern World?

Dutch East India Company is the first-ever company to offer its shares to the general public.

  • How many Underwriter can a company hire?

Small companies hire one underwriter but big corporations do hire multiple investment banks.

  • What is the under subscription of IPO?

Under subscription happens when fewer investors subscribe for the IPO than the Company made available.

  • What is the over subscription of IPO?

Oversubscription of IPO happens when more and more investors are willing to subscribe then the shares company made available to the public.

  • What is Grey Market?

A grey market is a place where people trade a share of any company way before they are officially open for subscription. It is an illegal market.

  • Is it good to buy shares at IPO?

This all depends on the number of shares subscribed by the investors. If it surpasses the number of shares offered by the company then shares get listed at a premium price. If not then it get listed at Discount.  So always check the subscription status of the IPO.

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