IPO is a short form of ‘Initial Public Offering’. IPO is a way of raising fund from the public. When a company issues its shares in the Primary market and gets its name listed on the exchange for the first time, it is called IPO, and issued shares will publically traded in the secondary market.
There is another term for IPO i.e. ‘going public’.
What are Primary Market and Secondary Market?
Primary Market is a place where a Company issues its shares to the public for first time to raise the capital.
Secondary Market is a Place where stocks are traded after the Initial Public Offering. At this place you and me buy and sell the shares of the listed companies.
Why does a company issue an IPO?
Why does a Company choose to Go Public?
- There may be various reasons for issuing the IPO, we are discussing few fundamental reasons why a company issue an IPO:
- Very fundamental reason for any company is to raise the capital for its expansion and improve their business.
- When a company offers its shares to the public it increases its liquidity in the market.
- Going Public shows that Company has successfully gained the good brand value and credibility in the market.
- IPO helps a company to raise the capital from public for various reasons like Expansion, improve the business, for better infrastructure, to repay loans etc.
- Going public, a company usually gets better ratings.
- As per the market demands a public company can always issue more shares.
What is process of issuing an IPO?
It is a step by step process we discuss the process is possible easy way below:
Step 1: Selection of an Investment Bank
Selecting an Investment bank is a very first step of issuing an IPO. Investment Bank provides Underwriting Services. Investment Bankers are also known as “Underwriters’ and it plays a role of middlemen between the Company and the Public.
Factors considered by Investment Bank:
- Credibility of the Company.
- Size of the issue.
- Type of securities to be issued.
- Negotiation details in the Underwriting agreement.
Step 2: Due Diligence and Filing with SEBI
Once the deal is done between the issuing company and investment Bank, the next step is prepare a registration statement to be filed with the SEBI (Securities and Exchange Board of India). This statement consists the information about the Company such as Financial Statements, Management Background etc.
Once the registration is placed with SEBI, it needs a cooling off period. In this duration SEBI performs all the necessary investigations about the company and make sure that all the information it received is appropriate.
After completing all the necessary due diligence activity SEBI approves the offering and set a Date on which the IPO is to be issued. This date is called the “effective date”.
Step 3: Deciding Price or Price Band
The effective date is decided, company and Underwriters (investment Banks) decides the price or price band of an IPO. It is the price at which the issuing company will sell its shares in the open market.
Once the stock starts trading in the Secondary Market, money raised through the sale of shares in the secondary market.
How can one apply for an IPO?
There are two varieties of IPO “Fixed Price IPOs” and “Book built IPOs”. In a Fixed price IPO company fixes the price in advance and in Book built IPO company provides a price range for the IPO.
There are two ways you can apply for an IPO
First get the IPO application from brokers and banks.
Fill the application form and submit it along with required amount in the bank.
In case the stocks are not allotted to you will receive your cheque as a refund amount.
Online method is much convenient option to apply for an IPO.
First you need to choose the IPO.
Complete all the formalities.
Once the IPO is open shares will directly come into your Demat Account.
In case the shares are not allotted money will be credited back to your account.
Please make a note: in both the method you need a Demat Account.
What is ‘Application Supported by Blocked Amount (ASBA)’?
ASBA is a new method of payment developed by SEBI in order to apply in IPO. In this method the Bank get authorization to block the application money in the bank account to subscribe the issue. If the investor gets the allotment application money shall be debited.
In this process the investor need not to pay the application money by cheque, money will remain the account. Just the application amount gets blocked and you will continue to earn the interest.
Some important terminologies related to IPO
Book building has no fixed price for the shares; instead company comes up with the price range for an issue. Actual price will be determined on the basis of bids.
It is a capital which a company is allowed to issue. A company cannot issue shares beyond what is mentioned in the memorandum.
It is a capital which a company has actually issued to the public in primary market.
It is capital which is subscribed by the public in primary market.
It is an issue made on the reserves and surplus of the company without paying any charge.