IPOs Universe
FAQs on IPOs
The process through which a private company offers its shares to the public for the first time is called an Initial Public Offering (IPO).
After the IPO, the company becomes publicly listed on stock exchanges, transforming it from a privately held entity with a limited number of investors to a publicly traded one, allowing anyone to buy or sell its shares on the stock market.
This process enables the company to gather equity capital from a wider range of investors. IPOs are introduced in the primary market, and once listed, the company’s shares are actively traded in the secondary market, facilitated by the stock exchanges.
There are 4 type of Investors in an IPO:
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- Qualified Institutional Buyers (QIBs), which include:
- Mutual funds
- Foreign institutional investors
- Commercial banks
- Insurance companies, among others
- Anchor Investors:
Are QIBs who are required to invest a minimum of ₹10 cr for a mainboard IPO, however the price for them is fixed and bidding begins for them one day prior to the start of the issue.
The presence of well known reputed investors in the anchor book instill confidence in retail investors to apply for the IPO. - Non – Institutional Investors (NIIs), whose application value is more ₹2 lakh:
- Corporates
- Individuals (other than retail investors)
- Others like societies and trusts, eligible NRIs, etc
- Retail Investors, whose application value is less than ₹2 lakh
- Qualified Institutional Buyers (QIBs), which include:
The full form of GMP is Grey Market Premium. This refers to the ‘premium’ that investors are willing to pay over the issue price of the said IPO before it is listed on the stock exchanges.
It acts as a indicator of the market sentiment for the IPO and reflects on how the IPO may perform on listing day.
The full form of IPO is Initial Public Offering.
New to IPOs?
Here's a handy beginner's guide to get you started and help you make the right moves.
An Initial Public Offer (IPO) is the process through which a private company sells a portion of its shares to the public for the first time and goes ‘public’.
It is the debut moment for a private company as it makes its shares available to the public. This process enables the company to gather equity capital from a wider range of investors. After the IPO, the company becomes publicly listed on stock exchanges, transforming it from a privately held entity with a limited number of investors to a publicly traded one, allowing anyone to buy or sell its shares on the stock market.
IPOs are introduced in the primary market, and once listed, the company’s shares are actively traded in the secondary market, facilitated by the stock exchanges.
Approval from the market regulator SEBI (Securities and Exchange Board of India) is mandatory before any company can launch its IPO.
Why do companies go public through an IPO?
- Access to capital
An IPO enables a company to gain access to capital for expansion, undertaking acquisitions, using the funds for research and development or for working capital needs - Reducing existing debt burden
By raising equity capital from the public, it can pay off existing loans and reduce its debts - Provide an exit for early investors and founders
An IPO offers existing shareholders, such as early investors, founders, and employees, the opportunity to monetize their investments. They get the opportunity to convert their ownership into cash. This liquidity is especially valuable if they have been holding onto their investments for an extended period. - Increase credibility and public awareness of the company
IPOs give a big boost in terms of visibility, reputation and prestige for a company. Since IPOs create a big buzz, being listed on a stock exchange can help improve brand reputation and credibility.
What are the types of IPOs
There are two types of IPOs:
-
- Fixed Price Offering
The company announces the price per share of the IPO is fixed in advance. All applications and allocations will be at this pre-determined price. - Book Building Offering
Here, the company relies on a price discovery mechanism by announcing a 20% price band or range – comprising an upper and lower limit – for the shares. Investors can bid for the number of shares and the price they are willing to pay. Based on these bids, the final price at which the shares will be issued to the investors is determined.
- Fixed Price Offering
How does an IPO process work in India?
Pre-IPO
Once a company decides to go in for an IPO, it must work with investment banks to chalk out all the details of the IPO. It also needs to file a Draft Red Herring Prospectus (DRHP) with the SEBI. This is also called an ‘offer document’ and comprises details about the company’s business, risks, why it is going in for an IPO, how the funds will be used, etc. The SEBI may ask for changes, if required, in this document.
After making these changes, and getting approval from the SEBI, the BSE and the NSE, and the Registrar of Companies (ROC), the Red Herring Prospectus (RHP), or the ‘final prospectus’ is filed by the company. This comprehensive document enables potential investors to make an informed decision about IPO investment.
Once approved by the SEBI, the company can launch its IPO in the primary market. The company will then announce details such as lot size, price band, and opening and closing date of the IPO.
During the IPO
Investors can apply for an IPO during the subscription period announced by the company. The allotment of shares depends on the demand for the IPO. If an IPO is oversubscribed, then the allotment happens through a computerised process, and if it’s undersubscribed, then the investors may get the shares they bid for.
On the listing date, the company gets listed on the stock exchanges. Whether it lists at a premium or discount to its issue price is again a result of demand for the shares. This concludes the IPO process. The company is now a publicly listed company, with its shares trading in the secondary market.
