If you also invest in the share market or are interested in news related to it, then you must have heard one word and that is IPO. If it is about this year or last year, then you must have heard this word not once or twice but many times. Although those who have been following the stock market for a long time will be aware of it, but for new investors, it can be a bit complicated.
So, in today’s article, we will know what an IPO is, why it is needed and what you need to know about it.
So let’s know about it –
Introduction to Initial Public Offering (IPO)
IPO is a process through which a private company goes public by offering its shares to the general public. The company gives its shares to the public and collects funds in return.
A stock market debut means the initial sale of shares issued by a company. In other words, it happens when a company decides to sell its shares to the public. The company decides how many shares it wants to put up for sale, and an investment bank suggests the share’s starting price – based on expected demand.
The company which offers its shares to the public is known as the issuer. The issuer offers its shares with the help of an investment bank. After the IPO, the trading of the company’s shares starts in the open market.
IPO benefits for company – Why do companies go public?
- To raise capital – Whenever a company gives its shares to the public through IPO, then the company gets a lot of money, which can be used by the company to expand itself.
- Long Term Benefits – Whenever a publicly traded company enters into any kind of deal with any other company in the future, it can also pay through stocks. Otherwise, the company would have to pay the entire amount through cash, which would have become a very difficult task.
- Reputation – Whenever a company brings its IPO, it also increases its reputation. Listed companies are considered to be better and their market reputation is also good.
Economy of IPO
When a lot of IPOs are coming into the market, it can also mean that the condition of the stock market or the economy is fine.
Whenever there is a financial crisis of any kind, the listing of an IPO is marketed during that time because the market price is already undervalued. On the contrary, if many IPOs are being launched one after the other, then we can guess that the condition of the stock market or economy is improving back.
How do IPOs work?
Before an IPO, a company is considered private. As a private company, the business has grown with a relatively small number of shareholders, including early investors such as founders, family, and friends, as well as professional investors such as venture capitalists or angel investors.
When a company reaches a stage in its development process where it believes it is mature enough to meet the rigors of SEC regulations, as well as the benefits and responsibilities to public shareholders, it may advertise its interest in going public.
Typically, this stage of growth will occur when a company has reached a personal valuation of about $1 billion, also known as unicorn status. However, private companies with different valuations with strong fundamentals and proven profitability potential may also qualify for an IPO based on market competitiveness and the ability to meet listing requirements.
An IPO is a big step for a company. This facilitates the company to raise a lot of money. This gives the company more potential to grow and expand. The increased transparency and credibility of share listings can also help in getting better terms along with borrowing funds.
Process of launching IPO
These 5 steps are involved in the process of launching any IPO –
1. Choosing a Lead Investment Bank
The process of IPO begins with the selection of a Lead Investment Bank. This process usually starts 6 months before the IPO comes out. The company bringing the IPO selects a bank based on its research.
The company needs an investment bank that can sell the company’s shares to as many other banks and Institutional Investors and Individuals as possible. It is completely the responsibility of the investment bank how it brings all the buyers together.
To do all this, investment banks generally charge fees ranging from 3 to 7% of the total IPO sales.
This process of handling an IPO by an investment bank is known as underwriting. Once the bank is selected, the company and the bank sign an Underwriting Agreement, in which the details related to the IPO are mentioned.
2. Due Diligence
The next process of any IPO is due diligence and regulatory filings. This process takes place three months before the launch of the IPO. The entire team of IPO like Lead Investment Bankers, Lawyers, and other officials determines the Due Diligence. All necessary financial information is tracked by this team.
Investment Bank submits a registration form to SEBI which contains financial statements, management background, and other statutory information. It also contains information about the purpose of the IPO. Complete details about where the IPO money will be used and how it will be used are in this statement. In this, the business model of the company and other related factors are also mentioned.
After this SEBI will invest in the company and make sure that everything written in the statement is correct or not.
The third and most important process of IPO is – Pricing. The pricing of any IPO depends on the value of that company and the current state of the market and economy.
After getting approval from SEBI, SEBI and the company decide the date of IPO. Apart from this, the financial information and other related information of the company is also circulated.
The company writes a transition contract for all the vendors, in this also the financial statements of the company are mentioned.
The Board of Directors meets three months before the launch of the IPO and the audit is reviewed. The company then contacts the stock exchange through which the IPO will be launched.
In the last month, the company submitted its prospects to SEBI. Apart from this, the company also announces how many shares are available to the public.
The fourth process of IPO is known as Stabilization. This process happens immediately after the IPO. After the stock is issued, the underwriter creates a market for it. Through this, it is ensured whether there are enough buyers to keep the stock price just right. This process lasts for 25 days which is known as the Quiet Period.
The fifth and last stage of IPO is known as transitions, due to which the market competition becomes open. It starts after the Quiet Period is over. Underwriters provide information about the earnings of the company so that investors take decisions accordingly.
Insider investors sell their shares 6 months after the launch of the IPO.
What are the types of IPO?
Primarily, there are 2 types of IPO issues: Fixed Price Issue and Book Building Issue.
Fixed Price Issue
Thе issuing company determines a fixed price for thе issue. So when thе IPO іѕ floated, thе price of thе IPO іѕ pre-determined.
Book Building Issue
Thе issuing company ‘discovers’ its price using thе book building process which іѕ based оn thе demand оr applications received from clients аt various price levels. In such an issue, thе price of allotment іѕ determined after thе IPO subscription closes.
How to invest in an IPO?
The company issuing the IPO opens its IPO for investors for 3-10 days. Meaning when any IPO comes, any investor can buy it within 3 to 10 days. If a company keeps its IPO issuance period for only 3 days, then someone keeps it for more than three days.
You can invest in the IPO within these specified days by visiting the company’s site or through registered brokers like Zerodha, Upstox, Angel Broking. Now if IPO is a fixed price issue then you have to apply for IPO at the same fixed price, and if IPO is a book building issue then you have to bid on that book building issue only.
IPO Allotment Process
When the IPO opening closes, the company allots the IPO. In this process, the company allots the IPO to all the investors and after the IPO is allotted to the investors, the shares get listed on the stock exchange (STOCK MARKET).
After listing in the stock market, shares are bought and sold in the secondary market. Unless the shares are listed in the stock market, you cannot sell them. Once the shares are listed in the stock market, the money and the shares are exchanged between the two investors.
Once listed, you can also sell and buy shares according to the stock market timing with the help of brokers like Zerodha, Upstox, Angel Broking, etc.
Advantages of IPOs
- Through IPO, it is informed that a company is performing well and the company is going to work on more new projects by raising funds and wants to increase its business.
- Various types of Mergers and Acquisitions payments can be made with the help of shares which get rid of cash transactions.
- With the help of an IPO, any company can hire good employees and by offering shares to the employees during the IPO, the company can also hire new people at a low wages.
- When the share price rises, the promoter’s net worth also increases if the promoter owns shares in the company. This gives the promoter the fruits of his hard work.
Disadvantages of IPOs
- The process of IPO is very costly for a company. The leader of the company pays more attention to the IPO, which can make a difference in the routine work of the company. Investment banks also charge a hefty fee for providing their service.
- The owners of the company cannot sell their shares immediately after the launch of the IPO as doing so may result in a fall in the price of the company’s shares.
- The control of the business of the company goes to the Board of Directors and the owner of the company may or may not be a part of it. The Board of Directors has so much power that they can even remove the owner of the company from the company.
- The company has to operate under the rules of SEBI.
- The public gets to know a lot about the company.
Some Important Terms you need to know about IPO
The terms below will help you understand an IPO
Issue Name – Thе name of thе company which іѕ issuing thе IPO іѕ known as Issue Name.
Issue Type – There are 2 types of IPOs – Book Building & Fixed Price.
Price Band – In case of a book building issue, thе company gives a price range within which you can apply. This price range іѕ known as Price Band of аn IPO.
Cut Off Price – Thе price of allotment of аn IPO determined by thе company after thе book building process іѕ called Cut Off Price. When applying for аn IPO, you can either bid for thе IPO by quoting different price levels & quantity оr else you may say cut off which means thе final price decided by thе company іѕ acceptable to you for allotment.
Cut Off Date & Time – All IPOs are open for subscription for a few days (generally 3-5 days) only & оn thе last day there іѕ thе last time permitted for you to make an application. This last date іѕ called cut off date & last time іѕ cut off time. No IPO orders will be accepted beyond this point.
Lot Size – Unlike stocks (secondary market), you can’t buy IPOs іn any numbers оr quantity you wish for. There іѕ a fixed quantity, which you can apply for of іn multiple of that quantity can be applied. This quantity іѕ is known as lot size.
Whenever a company’s IPO comes, people have a huge enthusiasm about that company because investors think that it is a good way to earn profits in a short period of time but sometimes investors may also have to lose their money and There is also the possibility of loss.
So if you are going to invest in any company’s IPO, then do research about it well first and if the business model of the company is really good and you think that the company can perform well in future then only In this you should invest according to your discretion.
Thank you !!
Related frequently Asked Questions
IPO is the abbreviation for “Initial Public Offering”, for the first time a company offers shares. Basically, an IPO means that a company raises money on the stock exchange by selling shares, i.e. shares, to investors. As a result, these investors become shareholders of the company.
The reasons for this may vary depending on the circumstances. Most companies want to raise capital to fund expansion, reduce debt, attract and retain highly skilled employees, or generate income. A stock exchange listing also enables companies to have a stronger public presence and to improve their own profile.
Investment banks set the IPO price. The company decides how many shares it wants to put up for sale to the public. The nominated investment bank then evaluates the company. Finally, the starting price of the share will be announced. Once the listing is made, the public can begin stock trading.
A successful IPO enables companies to raise large amounts of capital. An IPO can help increase exposure and improve the reputation of the company in question. As a result, the company’s sales and profits can increase. IPOs are also beneficial for traders, as publicly traded stocks are easier to acquire than just privately traded stocks.
Listed companies are subject to the rules and regulations of the relevant financial supervisory authority. Among other things, companies are required to provide financial disclosure – which includes information on accounting, taxes and profits. IPOs are also associated with significant costs. When a stock is performing poorly, the company may be forced to raise additional funds.
The length of an IPO process can vary depending on how well it is managed and coordinated. The first step is a company financial review, which can be the longest part of the process – especially if the company’s books are not kept properly.
The company must prepare a registration statement to submit prior to the IPO. In the next step, the exchange reviews the application. If there are no concerns about this, the check can be carried out relatively quickly. A well-managed IPO can take up to 12 months to complete, but it could also take longer.
IPO prices are calculated by an investment bank. First, a company decides how many of its shares it wants to sell. The nominated investment bank then conducts a thorough assessment of the company. Finally, the starting price of the share will be announced. Once the listing is made, the public can begin stock trading.