Before we learn, what is exactly Initial Public Offering (IPO) and its process lets us first analyze what is the reason we need them in the first place?
Rama has the retail business of Supermarkets. She started with one store and now the number has reached up to 5.
She wants to grow her business more and let others enjoy the benefits of her services.
Five stores in India was an achievement but is it a success story yet if she wants to expand it? No, a large amount of capital requirement is there to fulfill her dream.
She will ask her parents and family to put in extra money, and she will also put her profits and savings into the business but still, the funds are minimal.
She was advised to seek assistance from a bank and the bank agreed to provide her capital of Rs 2500000 at 10% interest.
The money she required was much more, and she feared what if she is unable to repay the loan? It can impact her hard-earned business. She drops the idea of borrowing debt.
She tries to approach an angel investor for her business, and she finds one who invests in her business and takes some part of ownership in return.
Rama gets better within the span of 5 years, and now she wants to grow her business even bigger and angel investors also want to exit the ownership and book profits.
How will a company move one step further, and how does the public take a part in it?
What is IPO?
When a company offers its share (ownership) for the very first time, it’s called an Initial Public Offering, abbreviated as IPO.
The private company does this to become public and raise funds from the primary market (New issuance of securities).
After the listing completion on the share market, i.e., secondary market the shares are freely traded in the market It is an essential step for the development of the company.
Why does a company want to offer IPO?
- A Company may require capital to fund their projects.
- One of the smart ways a company can pay its existing debt is through Initial Public Offering IPOs.
- Lastly, it can be used to provide an exit to early investors like angel investors, venture capitalists, etc.
Process of IPO:-
STEP 1: Appointing a Merchant Bank
A company has to appoint a merchant bank according to their skills and reach for their IPO and Lead managers will assist the company in every way possible by evaluating the company in detail.
STEP 2: Registration
Firstly, underwriting of the shares becomes important for the company. An underwriter is an intermediary between the company and the public.
It is a kind of guarantee to the company that a particular amount of capital will be raised by various methods.
Further, a Draft Red Hearing prospectus will be prepared which will have all the relevant information about the company.
All the listing requirements and compliances must be maintained, then this document will be submitted to the SEBI.
After checking and verifying everything, SEBI will give its approval.
STEP 3: Promotion
After the approval from SEBI, the marketing proceeds with various methods like roadshows, social media marketing, presentations, meetings, etc.
Their main emphasis is to engrave institutional investors.
STEP 4: Pricing
- Fixed Price Issue-Company select the price and investors have to buy shares at a fixed price in this method.
- Book Building Issue- A price band is given (eg-180-200) to the shares and the response of the market and bidding (A bids 181, B bids 185, C bids 193) is taken into the consideration for the fixation of the final price.
STEP 5: Application and Allotment
If the Company wants to raise 100 crores from the market, and they receive a 200 crores application for the issue.
This means the IPO got oversubscribed and if they receive 90 crores it means unsubscription of the shares.
It is not impossible to allot shares to everyone when it is oversubscribed.
So many applications get rejected during this process and allotment is done to the selected qualified investors under the IPO allotment process.
Advantages of IPO
- A good amount of capital gets raised via IPO and the business can run more efficiently with this capital.
- A market image of the company comes into the public, and it gains recognition which supports the growth of the company.
- With proper research, some investors and traders get listing gains which benefits the company as well as the investors.
Disadvantages of IPO
- Not a lot of information is available about the company in the public domain, so it can prove a disastrous condition for the investors and the market volatility can make them lose faith in the company.
- The company needs to abide by numerous compliances and more money gets spent with all kinds of fees that need to be paid accordingly, so it can be a costly process for the company.
Tips to consider before applying for an IPO
- One needs to research very much about the company even if the information is scarce it should be gathered and a good decision should be made only once the research part gets completed.
- A prospect needs to be read properly to gain more information on the company.Skipping the process of going through prospects can later book losses if the company is fraudulent.
- Researching about the Investment bank and the underwriters that are carrying the IPO can prove a beneficial decision.
IPOs give a major boost to the company, its investors and the economy.
A business that has the potential to prove better gets the deserved recognition, which is limited when it’s a private company.
With SEBI approval which is the regulator of Initial Public Offering (IPOs) and Shares markets in India it gets listed on the stock exchange and the price discovery, as well as the worth of a company, is known to its interests.
Proper research and checking of the fundamentals of the company will make you part of the institution, a business with good strategies will keep your faith in the company invested.
An IPO is the beginning of the journey that can give one endless gain and insights into the market.