What is Initial public offering? | Best explain in 2021

What is Initial public offering?– Many of us invest in the share market but don’t know fully about Initial Public Offering. They just know that it is related to the share market.

When a company wants to raise money from the public, then the company has to enroll itself in the share market. You can call it an IPO.

Many of us want to invest in some IPO, but because they don’t know about the IPO properly that is why they are scared to invest in these IPO’S.

Here we will talk about all the hidden things in the IPO. Before we know the process of IPO, we should know that why a company needs IPO.

If you understand What is initial public offering? in detail. Here it is–

We need to understand the stages of the IPO first.

What is Initial public offering?
What is Initial public offering?

1.STAGE 1-

In this stage, a company starts with Promoter funds. That means the founder invests his/her saved money or he/she takes money from his/her friends or family to invest in the business.

2.STAGE 2-

The Angel Investor invests some money in this stage when the company is growing or a little bigger.

3.STAGE 3-

In this stage, Venture Capital and some Private Equity firm invest.

4.STAGE 4-

This stage is called IPO. Here the company got listed on the Bombay Stock Exchange ( BSE ) or National Stock Exchange ( NSE ) and some investors invest in this.

There are many types of investors here like institutional or non-institutional E.T.C.

What are the requirements of IPO–

To know What is Initial public offering? first, know about the requirements.

The simple and main reason for IPO is that when a company needs money, the IPO of that company will help raise money from the public.

When the company was in the 1st, 2nd, and 3rd stage some private investors were investing in the company.

But the company is now at a stage where private investors can not invest as much as the company needs. So here the company needs IPO.

Because the public will invest here, both the invested money and the investors will increase.

Institutional investors can also invest in the IPO. Institutional investors like- Mutual funds, pension funds E.T.C.

So the main reason for IPO is-

1.EXPANSION-

If a company wants to expand then IPO is needed.

2.The company can repay some of its old loans with the raised money.

3. If the company wants an exit from the private investors, then also IPO can help.

What is Initial public offering?
What is Initial public offering?

The process of IPO–

It is also an important part of the topic What is Initial public offering?.

The company that wants to bring an IPO first hires an investment bank or merchant bank. Now you will ask that what is an investment bank?–

  • For example, if “x” company wants to be listed on the stock exchange then it needs to hire an investment bank, let’s say the investment bank is ABC capital. All the major banks have their investment banks, that bring IPO.

If a company wants to hire an investment bank then the company will look for-

1.Reputation and track record of the investment bank to raise the funds for the IPO.

2.Quality and Research of the investment bank to pick an IPO.

3.The company will also check for the bank’s Distribution expertise. Like, how many institutional investors they have tie-ups with, and how they did marketing for the retail investors E.T.C.

  • The next step is Due Diligence and Filings. In this process the main thing is Underwriting. Here the investment bank gives the Firm commitment. That means- (for example) the investment bank will raise 500 crores for the company.
  • But if they failed to raise that committed amount then the investment bank will fulfill that amount from their pocket. And if they raise some extra amount then that will be a profit of the investment bank.
  • This is called Best Efforts Commitment. Here the investment bank will do the pricing and distribution but will not take any guarantee that how much money can be raised.
  • This stage is called Syndicate Underwriting. If the IPO is too big, it may not be possible for a single Investment Bank to handle it, so they enlist the help of many investment banks and form a syndicate.

Here we called the main manager as a Lead manager and others are called as Participate Manager. We called this Syndicate Underwriting.

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Red Herring Prospectus–

What is Initial public offering? this is a huge topic.

This part is also very important in this topic. It is a document of the company where all the details are getting noted.

Like- The business and promoter details of the company, its competitive advantage, capital structure, future business plans, risk, and opportunities, past financial data E.T.C.

From here all the details of the company are known in a very transparent way and it is an advantage for the investors to invest in.

The investment bank makes it.

Compliances and filings–

Understand all the points in the topic What is Initial public offering?.

This includes all types of guidelines or acts. Like- guidelines of SEBI, NSE/BSE and securities contract ( Regulation) Act, companies Act E.T.C.

In particular, it is very important to match the listing regulations. This is also what investment banks handle.

Pricing–

What is Initial public offering?
What is Initial public offering?

It is also the responsibility of the Investment Bank.

For example, the value of a company is 2000 crore but the investment bank says that they will sell a 30 percent share of the total value, which means 600 crores.

The rest will be kept by the promoters or existing investors. Here the issue size will be 600 crores.

Now to raise 600 crores the investment bank needs to issue a huge number of shares with a minimum price.

Like the other share ( except IPO ) public can invest as much they can or will.

But for the IPO the company fix a lot size with a certain number of share and if anyone wants to invest then he/she needs to buy at least one lot.

That will be the minimum investment anyone can do.

Let’s assume the company set a lot of minimum of 50 shares. So if anyone wants to buy then he/she can buy a minimum of 50 or in the multiple of 50.

Here if the company fixes 100 rupees per share then the minimum investment will be 50*100=5000 rupees.

Now in the pricing also the company can face two types of issues. One is – Fixed price issue. Let’s assume the investment fixed a share price of 100 rupees.

If anyone wants to invest then he/she need to pay 100 rupees per share.

If this does not get a good response then they will understand that the pricing was wrong. Here the problem is, it can take a long time.

So the preferred method is Book Building Issue. Here the investment bank will set a price band. Like they set the price will be 80 rupees to 100 rupees.

By this, the investment bank will check the market response.

As well as they approach many institutional investors or retail investors who can invest a good amount. After all this, any price can be fixed within the price band.

In this price band, we call the minimum price a Floor price and the maximum price a Cap price.

And the difference between this two can be 20 percent maximum. This is the major concept of the Book Building Issue.

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Distribution–

This is one of the most important parts of What is Initial public offering?. This will be done by both the company and the investment bank.

But the main responsibility will be on the investment bank. Here they need to sell the issued share.

They can sell it to qualified institutional buyers like mutual funds, pension funds who can buy a large number of shares at a time.

As well as they will attract non-institutional investors also. And the third one is retail investors.

After the distribution, the Application Process will start.

Here if all types of investors think that they are getting a good share price then oversubscription can also happen.

Like the company wants to raise 600 crores but the application is coming for more than that. In this case, it is not guaranteed that everybody will get the shares.

Here comes the Share Allotment. Nowadays every investor has a quota.

Like the qualified institutional investors have a 50 percent quota, non-institutional investors have a 15 percent quota, and the retail investors have a 35 percent quota.

But if the oversubscription happens then it will be divided in another way.

What is Initial public offering?
What is Initial public offering?

Listing on the stock exchange–

This is the final part of What is Initial public offering?. It can be listed on BSE or NSE (where the company wants ).

Here we will understand how much time will the whole process take. So the bidding or offer will be open for 3-5 days generally.

( Now you can apply for IPO directly through your Stock Broker using UPI ). Now let’s assume the bidding was open for 3 days and the closing was the 5th of a month.

Now this will be listed on the stock exchange within 3 days from the closing date.

These three days are given to share allotment, refund, and fundraising. It was six days at first but now SEBI has changed it into 3 days.

By this, the issuer is getting faster access to capital, and the investors getting early liquidity.

FAQ–

These questions have been asked frequently in the topic What is Initial public offering?.

1.What is IPO and how does it work?

It is a form of equity financing, where a few percentage ownership of a company is given up by the founders in exchange for capital.

Read the article to know more.

2.Should I buy IPO first day?

It is totally up to you. Before investing try to get some knowledge of the company.

And if you invest then try to keep it for the long term. You can take expert help also.

3.Initial public offering meaning-

When a company wants to raise money from the public, then the company has to enroll itself in the share market.

You can call it an IPO. You can read this article to know in detail

4.Initial public offering process-

We have discussed all the points in this article.

5.IPO listing date-

Let’s assume the bidding was open for 3 days and the closing was the 5th of a month.

Now this will be listed on the stock exchange within 3 days from the closing date.

Read the article carefully.

If you have any questions on What is Initial public offering? then comment below.

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