Introduction of IPO
What Is IPO (Initial Public Offering)?
The full form for IPO is Initial Public Offering. It is here the private companies go public through trading of shares and raise funds in the market. The reasons for raising funds may be varied. The requirement of the funds could be for business expansion purpose or diversifying the business or opening of a sister-concern etc.
IPOs Guide for Beginner
As beginner you must understand what IPO is and how it works? Under this section, all the basic information about the IPO (Initial Public Offering) is shared to let you better understand its process, terms you should be acquainted with and what it offers and what not. IPO means when the privately held company that has a handful of shareholders, decides to go public by trading its shares. It therefore becomes a publicly traded company through offering shares to the public for the very first time. The company gets its name listed on the stock exchange through IPO.
How an IPOs Works?
IPO works with the help of expert advisors. This includes lawyers, underwriters, accountants, and auditors of the private company. The team helps to deal with the challenges that a private company faces while it decides to go public. After going through the SEC, roadshows begin. SEC ensures that the company going public and the investors are getting a win situation. It makes sure that there is no breach of contract or any rules and regulations. It has the power to conduct civil or criminal trails hence.
What is an IPO Process?
To handle IPO, the private company before it becomes public must hire an investment back. The financial arrangements and underwriting agreement are taken care of by the investment bank and the company. The underwriting agreements are filed with the SEC towards registration statement. It is only after the scrutiny of the SEC that the date of the announcement on IPO is decided. However, one needs to understand that when you apply for an IPO, It is only an invitation to offer. It is only after the IPOS issuer confirms the share, the application amounts to the offer.
Risks & Benefits of IPOs
Mainly an investor gets to buy shares at affordable prices before the listing price. Retail investors enjoy the discounted rates too. It gives the investor ample opportunity to further invest in the company in the future. The motive behind primary market is to provide investors the opportunities to buy shares at an affordable price prior to its listing price. In addition to that, the retail investors get to enjoy the perks of discounted rates while applying for IPO’s. When an investor holds shares during the primary market period, he gets an opportunity to participate in the future success of these companies.
In India, the IPO listing takes up to 7 working days. Though there is no studied relationship between oversubscription and IPO listing price, oversubscription could be the reason for a good listing of the shares, market conditions, and reasonable price. Thus, there is much precaution to be taken before investing in any IPO. This section deals with the advice from the experts in the industry. It has questions and answers to the most searched about information regarding IPO.
How to Invest in an IPO?
The right way to invest in an IPO is to check for the QIB (Qualified Institutional buyer) category. If you find that the QIB is oversubscribed, it is a sign that you can go ahead with investing in that IPO. Also look for price to earnings ratio, price to book ratio as well as return on equity. Investing in IPO may be a decision that needs to be taken with utmost care. One needs to do a background check; you must know who is underwriting it, the lock-up period, flipping etc.
How safe is IPO?
IPO can be conducted only when it is registered with the SEBI (Securities and Exchange Board of India). It is mandatory for companies who wish to go public to fill the S-1 form. Along with the company the investment bank also has to fill in the registration form stating all the information such as the-
- About the company’s finances standing, latest & upcoming IPO details etc.
- Thus, the public going company has to state the business strategy of the organization
- The fiscal records showing income statements and balance sheets must be shown,
- the potential risks involved in the investment must be stated,
- the amount of stock offering should be mentioned,
- how the proceeds from the offering are going to be utilized,
- Comparative study of the company’s financial situation and objectives etc.
It is only after SEBI has verified all the details that the company can go ahead with IPO. Hence, investing in IPO is safe.
The role of underwriters
When you see the term ‘underwriters’ it must have bothered you to know more about them. Underwriters are the investment bankers who send representatives to the public going company offering best IPOs. These representatives chalk out the entire plan of action so that the company gets a fruitful opening to IPO. The underwriters are compensated for their services. There are typically two ways of underwriting such as-
- A Bought deal is where the underwriters purchase the IPO and resell it tothe investing public. The difference in the amount that remains after the purchase of shares and reselling it is the compensation amount. Here the risk of IPO listing is borne by the underwriters
- Best effort deal, on the other hand, works on selling the IPO to the investing public at the best price. The risk involved by the underwriters is nil. They don’t have to buy shares. In such a scenario, the compensation is a fixed amount.
Terms to be acquainted with-
It is essentially a marketing technique to create awareness and interest in the IPO. As the name suggests, Roadshow is a platform of IPO where several meetings and marketing programs take place. One can find potential investors and brokers here. The roadshow is conducted earlier than the release date of current and forthcoming IPOs. It is purely done to generate demand for IPO. There are many qualified institutional buyers who show interest in the pre-IPO sale. Roadshows build brand publicity.
It is an agreement between the three parties-companies offering IPO, the company insiders as well as those pre-IPO share buyers, where the deal is not to sell the shares up to a particular period of time. It is known as the lock-up period. This arrangement is made so that the pre-IPO owners do not pawn their holdings to the public when it is overpriced. If the opposite holds true, it will lead to market price drop due to the supply of more shares.
Some call it the best way to earn short-term gains, while there are many who think flipping is the way to kick-start the trading. Flipping is when an investor dumps his allotted share to the day when it is listed in the market. He gets to earn well. However, the downside is it can bring down massively the share prices.
IPO subscription means there is a demand for IPO Shares. The factors that affect the oversubscription are the strong brand names and reasonable valuations. Oversubscription is often a sign that it is doing well at the listing on the stock exchange.
It is the price decided by the lead managers of the company for upcoming IPO. SEBI has no role to play under this segment. The lead managers through market study and roadshows come up with a price that is appropriate for the IPO pricing.