Frequently Asked Questions (FAQs)
1. Why do companies offer an IPO?
- For a private company, to get a huge fund is a difficult task. But when it decides to go public by trading its shares, it benefits in the expansion of the business, improvement in the business, aids in better infrastructural facilities, repayment of the loans and so o. Thus, making it a money-making process.
- When the name of the company is seen at the stock exchange, it aids as a brand awareness and pulls in a great amount of pride and credibility.
- With the growing demand in the market, issuance of more stocks is possible for a public company. It automatically will lead to way towards acquisitions and mergers.
- Moreover, for a company, when stocks are traded, it offers increased liquidity. It provides wider doors to employee stock ownership plans.
- Private companies have mostly found an increase in the value of the shares after the opening of IPO that helps to raise capital that is required for internal growth purpose. It is a win situation for public companies as these companies get the advantage of quick selling of shares.
2. What is the process of company offering an IPO?
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.
3. Who can apply for an IPO in a company?
Anybody above the age of 18 can invest in an IPO. The only requirement is he or she should have a demat account. The documents required for the application would be the PAN card issued by the Income Tax Department.
Unless you want to sellthe shares on the listing, you do not require a trading account, but if the opposite is true you will need a trading account. It is best to open a trading account along with the demat account for all the future transactions.
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.
4. What are the varieties of an IPO?
First things first;
- IPO can be seen in two varieties known as –
- Fixed Price IPO- Under this category the price is fixed in advance by the company as the sum of that par value as well as the premium value. As an investor, one can apply for the IPO at that price only.
- Book Built IPO- Under this head, the company provides an indicative price range for the IPO but the final price will be revealed only through book building process.
Between the above two processes, the book building process is dominant.
5. How many categories does an IPO have?
The IPO categories can be seen in three classes-
- Retail: Here investments up to 2 lacks are under this category. SEBI has designed the allotment method. It is made so that maximum number of retail investors can participate.
- HNI:The allotment is proportionate
- Institutional: The allotment is discretionary.
6. Which form of an IPO is preferable?
You can bid either through offline method or through online method. Under the offline method, you need to fill the physical form and submit to the IPO banker. Alternatively, the form can also be submitted to your broker.
The online application can be done through a trading interface that will be helped by your broker. People prefer online application because the documentation is easy.
7. Are there chances of any frauds? How do we take care of unauthorized transactions?
In order to prevent the unauthorized transaction, always update the mobile number or email address in your Trading or Demat Account either to your stockbroker or the depository participant. This will help you keep track about any fraudulent transactions taking place.
Also to avoid scams, refrain from issuing checks while subscribing for IPO. Instead, all you do is state the bank account number on the application form of the IPO and give standing instructions or authorization to the bank to do the payments at the time of allotment. As a precautionary measure always trade with registered brokers.
8. What is the difference between primary market and secondary market?
Under the primary market, an investor can buy stock directly from the issuing company. It allows the company to enter the secondary market.
The secondary market is when after the primary market investors are done with their slot of raising capital, the IPO gets listed on the exchange. This market is a combination of equity and the debt markets. The secondary market is used to trade listed equities.