Demystifying IPOs: A guide to what is an IPO
If there’s one thing that a business cannot function without it is the capital. All businesses, regardless of their size, need capital to finance their operations. Initially, all businesses start off as private entities. However, as they grow some companies often become publicly traded companies to raise capital for their businesses. Here we share with you in detail what an IPO is, why companies go public and how does it work:
What is an IPO?
In simple words, an Initial Public Offering (IPO) means a privately-owned company makes its shares available on stock exchange for the general public to trade. This act of issuing shares makes the privately-owned company a public company. IPO presents investors opportunities to buy shares and generate a return on their investments. However, it must be noted that risks and returns go hand in hand.
Why do companies issue an IPO?
Companies issue an IPO for various purposes. Some of the common objectives are to:
Infuse new equity capital into the business
Streamline the trading of its assets
Generate capital for various financial needs.
Convert the investments of private stakeholders into monetisable assets.
Can any private company issue an IPO?
Not every company can issue an IPO. In India, when companies decide to go public and have their shares traded on stock exchanges, they need to be fit as per the specifications laid out by SEBI. Eligible companies need to follow the SEBI-mandated process. Once SEBI verifies and approves the application, then only can the company announce a date for its IPO.
Types of IPO
Fixed Price Offering: A Fixed Price Offering in an IPO refers to the predetermined issue price at which a company chooses to release its shares to the public. The issue price is fixed and investors need to pay the full price of the shares when making the application.
Book Building Offering: In this, the issuing company presents a price range of 20% within which investors can bid for the stocks. Prospective investors participate by placing bids on the shares before the ultimate price is fixed. In this process, investors need to indicate both the quantity of shares they wish to buy and the price they are ready to pay per share. The final price of the share is determined by investors’ bid.
For how many days does the IPO open?
As per stock exchange rules, the subscription period is required to be open for a minimum of T+3 working days and should not exceed T+10 working days.
For how many days does the IPO open?
As per stock exchange rules, the subscription period is required to be open for a minimum of three working days but should not exceed ten working days.
What happens after the IPO?
Once the IPO is issued, the shares of the company are available for trading in secondary markets. Here's what you need to know about each market:
Primary market: In the primary market, the IPO takes place and new shares are issued directly by the company to the public. Investors buy shares directly from the company. The money from these sales goes to the company. This is the phase where the company raises capital for its corporate purposes.
Secondary market: The secondary market is where existing shareholders buy and sell shares among themselves. The company itself does not receive any funds from these transactions; instead, they occur between investors.
Planning to buy shares in the IPO? Here are some dos and don’ts
An IPO is an exciting opportunity for companies going public as well as investors. Buying shares in an IPO gives investors shareholder status, offering voting rights in the company's AGMs. On the other hand, in the absence of any historical data, it’s hard to predict whether an IPO will perform well or not.
Here are some dos and don’ts for investors:
Dos:
- Understand the company's business model, financials, industry, and growth prospects.
- Go through the prospectus for detailed information about the company.
- Evaluate the company's management team.
- Look at the overall industry trends
- Compare the IPO's valuation with its competitors
- Maintain a diversified portfolio
- Be aware of any lock-up periods that restrict investors from selling their shares after the IPO
Don'ts:
- Don’t invest in an IPO without thorough research.
- Don’t ignore risk factors. Be aware of the risks associated with the company's business and market conditions.
- Don’t invest only because of hype or speculation.