An investment in an Initial Public Offer has the potential to deliver attractive returns. However, before investing, it is essential to understand what an IPO is and how the process of trading these securities differs from ordinary stock trading. Also, the Investor should know the additional risks associated with IPO investments. In this write-up, we will discuss What is an IPO?
IPO stands for Initial Public Offer. A private company's debut offers an IPO as Public traded security on a stock exchange. When companies need funds, they list them on the stock market. The company spends the capital received through IPO as per the requirement. This fund can reduce the company's liability or expansion, etc.
Generally, IPO is done to infuse new capital into the company and raise capital for the future. Once the process of IPO is done, the shares of the company are listed and can be freely traded in the open market.
Any Individual who is a major and is capable of entering into a legal contract can be eligible for an IPO of a company. Apart from this, there are some other norms that an investor needs to meet.
1. Must have a PAN Card.
2. Must have a valid Demat account and trading account.
Typically, Companies issue an Initial Public Offer to raise capital, pay off debts, fund growth initiatives, raise their public profile, or create liquidity by selling all or a portion of their private shares as part of the IPO. Below mentioned are the reasons why IPO is made-
1.For Business Expansion
When a company feels that it is continuously moving forward and needs more expansion.For expanding its business to other cities, a company needs funds. In this situation, the company issues IPO. Although the company's expansion can also take the help of a bank loan, the bank loan also has to be returned to the company at a fixed time with fixed interest (interest). Whereas if the company collects funds through IPO, it does not have to return that money to anyone, nor does it have to pay any interest. If we talk about the benefits of people buying IPO, any investor who invests in IPO gets some percentage of stake in the company in return for that purchased IPO. So, for example, if a company has taken out some shares for IPO and bought two percent of those shares, you are the owner of two percent of that company. So in this way, both the company and the investor benefit from IPO.
2.For launching a new product or service
The reason for which a company can opt for Initial Public Offer is the Launching of its new products and services by the company. Whenever a company starts any new product or service, the company wants that service or product to be promoted and reaches as many people as possible. Therefore, the company issues IPO.
IPO can be categorized in two ways-
- Fix Price IPO - The IPO issuing company discusses the IPO price with the investment bank before issuing the IPO. In the meeting with the investment bank, the company decides the price of the IPO. After that, an investor can subscribe to the IPO.
- Book Building IPO - Under the Book Building Issue, the company decides a price band for IPO with the investment bank. It is issued only after the price band is decided by the company. After this, the investors subscribe their bid from the price band. There are two types in the price band.
- If the IPO price is less than the price band, it is called FLOOR PRICE.
- If the IPO price is high, then it is called CAP PRICE.
- In book building Initial Public Offer, a difference of 20% can be kept between the cap and floor prices.
In this red herring prospectus,
The details of the Company's Business
- Capital Structure.
- Purpose of raising funds
- Past Financial Statements
- Promoter's Expenses
- Net Proceeds of the company
- Legal opinion on the listings
- Details of Underwriting
- Promoters and Management Detail
- Attaining publicity and raising a profile as a listed company on the stock exchange.
- It helps in raising the capital
- Increases the market share.
- Promoters and early investors can earn profits and the opportunity to meet their financial commitment.
Below mentioned steps are followed for the process of IPO-
- Proper Due Diligence
- Choosing Underwriter or Investment Bank for IPO.
- Registering for IPO.
- Verification by SEBI
- Application to the Stock Exchange.
- Preparing for Roadshows
- Pricing of IPO.
- Allotment of Shares
In a nutshell, we can say IPO is an excellent opportunity for both the company and investors, but it is the responsibility of the Investor to do proper research and discover IPOs on various online news sources. This is because if there are success stories behind investing in IPOs, then there are also failures. So, it is better to keep a check on the Company's IPO and do a proper analysis.