Introduction:
Ipo means initial public offer. When a company sells its shares to the general public for the first time, it is called Initial Public Offering(IPO). Usually, when a company needs capital to expand its business, it launches its IPO. Until the company launches its IPO, it is not listed in the stock market and till then no common citizen can buy or send shares of that company.
Why do companies launch IPO?
Whenever a company wants to expand its business and for this it needs money In such a situation, launching an IPO is a better option for the company. The company gets many benefits by launching IPL.
1. The company gets money to expand its business.
2. The company is saved from taking loan,By saving interest on loans, the company is save more money as profit.
3. When you buy shares of a company, you also become a participant in the risk like the promoter of the company. But the promoter distributes his risk among many people.
4. When the company gets listed after IPO, anyone can buy or sell its shares. This gives the company's promoters, venture capital, angel investors an opportunity to sell their shares. In this way they can withdraw their initial investment from the company.
5. Some shares can be allotted to the already underemployed employees in the company.
6. After public listing, the name of the company becomes bigger because common people can buy or sell its shares and people get more information about the company.
What is process of launching ipo:
1.merchant banker - Merchant banker is also called running lead manager or simply lead manager. It helps the company to launch its ipo. like
• Doing due diligence of the company and giving due diligence certificate. They also have to see that the company has followed every rule of law.
• Preparing all listing documents including Draft Red Herring Prospectus (DRHP) in collaboration with the company. We will discuss about this in detail later.
• Underwriting shares. This means that the merchant banker has entered into an agreement to buy all or some of the IPO shares from the company and later sell them to the public.
• Helping the company in deciding the price band of shares in IPO. Price band means the price of the stock below and The upper price limit at which shares will be sold. In the example of our story Price band is 1562/- to 1875/-.
• To help the company in its road shows. Road show is the promotion and marketing of the company's IPO. marketing The entire responsibility lies with the lead manager.
• Appointing other intermediaries like registrar, banker, advertising agency etc. for IPO.
2. Submission of application to SEBI along with a registration statement. The registration statement tells what the company does, why it needs to launch an IPO and what is the financial position of the company.
3. Getting approval for IPO from SEBI. After receiving the registration statement, SEBI decides whether to grant approval or not.
4. DRHP- After getting the initial approval for the issue, the company has to prepare its DRHP i.e. Draft Red Herring Prospectus. It is also shared with the public. The information required to be included in DRHP is
↪ Size of IPO i.e. how big will be the IPO
↪ Total number of shares being issued
↪ Why is the company bringing the issue and what will be the use of the money raised from it.
↪ Complete details of the company's business, business model, expenses etc.
↪All financial documents
↪Management's view of how the company's business is going to be in the future.
↪ All risks related to business
↪Complete information about people associated with management.
5.Marketing the IPO – Releasing advertisements related to the company's IPO so that people can know about the IPO. This work is also called road show.
6. Setting the price band – The company cannot set a price band that is too different from the market expectation or else people will not subscribe to it.
7. Book Building – After the road show is completed and the price band is decided, the company has to officially open the subscription of shares for a few days so that people can invest money in the issue. Suppose the price band is Rs 100 to Rs 120, then book building will reveal at what price people are investing and which price they feel is right. Collecting all this information is called book building. From this the correct price can be estimated.
8. Closure – The listing price of the share is decided after the book building is completed. This price is usually the price at which the most applications have been received.
9. Listing Day – On this day the company's shares are listed on the exchange. The listing price is decided on the basis of demand and supply of shares on that day. After this the share is listed at a premium, par or discount from its cut-off price.
Special words related to IPO
Under Subscription: Suppose a company wants to sell 100,000 shares to the public, but during book building it is found that bids have come only for 90,000 shares, then it is said that the issue is under subscribed. This is not considered a good situation for the company because in such a situation it will be considered that the public did not like the issue.
Over Subscription: If 200,000 bids are received for an issue of 100,000 shares, then the issue is said to be oversubscribed twice.
Green Shoe Option: Under the underwriting agreement, the issuer has the right to allot additional shares (usually 15%) in case of oversubscription. This is also called overallotment option.
Fixed Price IPO: Many times companies fix the share price instead of the price band.
Price Band & Cut off Price: Price band is the range within which shares are issued. Suppose the price band is 100 to 130 and at the closing of the issue the price of the share is fixed at 125, then Rs 125 is called the cut off price.
