Initial Public Offering - IPO


What is Initial Public Offering - IPO


If a company wants to receive money through share market, then the company has to issue shares in the open market, which can be purchased and sold among the public. When a company issues its shares in public for the first time, this process is called IPO that is called Initial Public Offering.


In other words when a company issues its share for the first time to the public, then it is called IPO-(Initial Public Offering). These companies are issued IPO so that they can be listed in the stock market. After listed in the stock market, the shares of the company will be bought in the stock market.

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The full form of IPO is Initial Public Offering. Companies mobilize capital in several ways to increase their business. For the first time, the process of presenting the share among common people is called Initial Public Offering-IPO.


Red Herring Prospectus

Red herring prospectus is the most important document of any IPO. Whenever a company issues its IPO, it first releases red herring prospectus for public issue. This is a type of legal document that contains detailed information related to the company and public issues or IPO, such as business details, capital structure, risk factor, strategies, promoters and management etc.

This prospectus is approved from SEBI (Securities and Exchange Board of India) and you will find all kinds of information related to the IPO and company. Before investing in an IPO, one should understand prospectus’s information well.



Types of IPOs- Initial Public Offering

The company can issue two types of IPOs.

Fixed Price Offering :- Under fixed price method there can be no change in the price of shares. Investors buy it at the same price at which the company issues it. In fixed price offering the oversubscription levels are high, sometimes several hundred times.


Book Building Offering:-  Under book building offering there is no fixed price, but there is a price band. The lowest price in the band is referred to as the ‘floor price’ and the highest price is referred to as the ‘cap price’, in book building method investors can buy shares by bid for desired quantity of shares with the price which they would like to pay.



 

 

 

Why companies issue IPO

When a company requires additional or more capital, it issues IPO. This IPO can be issued by the company ever when it lacks funds, instead of borrowing from the market, it is better to raise money from the IPO. This is the expansion plan of any company. After listed in the stock market, the company can put its shares in other plans.


SEBI Guidelines for IPO

The Securities and Exchange Board of India (SEBI) is the regulator for all the security markets in India. It strictly follow to the rules from companies bringing IPOs. The company is obliged to give all types of information to SEBI. It is a necessary condition that the company will give all its information to SEBI. Not only this, SEBI is also investigating the company before bringing the IPO, the information given by company is correct or not.


Benefits of IPO

The capital invested by the investors in the IPO goes directly to the company’s, however in the case of disinvestment, the capital which is received from the IPO goes directly to the government. Once the shares are allowed to be traded, then after the purchase and sale of the shares, the benefit and loss to the shareholder have to be raised.




Types of investors in IPOs

People who buy shares of company or invest in it are usually called retail investors. Apart from this, the investor can also be placed in the non-institutional, High networth individuals and Qualified institutional bidders category. Any common person can purchase an IPO shares of maxium amount of upto Rs 2 lakh as a retail investors.


There are four types of investors in IPO

1. Qualified Institutional Buyers (QIB):- Under Qualified Institutional Buyers quota, financial institutions such as banks, mutual funds, insurance companies, Foreign Institutional Investors (FIIs) etc are permitted to bid for shares. A maximum of 50% of the issue can be reserved for investors falling under the QIB category.

2. Non-institutional investors (NII):- Under non-institutional investors quota, resident Indian Individuals, Hindu Undivided Families (HUF), companies, NRIs, Societies and trusts whose shares application bid is more than Rs. 2 lakh are allowed.

3. Retail individual investors (RII):- Under retail individual investors quota, only individuals both residents and NRIs along with HUFs are allowed to bid. Under this investors can’t apply for more than Rs 2 lakh (Rs 2,00,000/-) in IPO. A minimum of 35% of the issue has to be reserved for such people. 

4. High networth individual or investors (HNI):- Under this if retail investor applies more than Rs 2,00,000 /- of shares in IPO, they are considered as HNI.




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