IPO is Initial Public Offering is a process by which a company offers its shares to the general public to a new stock which is issued. The stock is listed for people to which they apply through their bids and if there does not get selected, they can buy/ purchase these stocks through their listing on stock exchanges.
The IPO process allows the company to raise money not only from the selected people at a time, but the general public who wants to also invest can also invest in these stocks. This changes the name of the company generally from a private limited company to a public limited company. There are some public companies that are not listed on the stock exchange but every listed company in India is a public limited company.
BENEFITS OF AN IPO
The benefits of the IPO are that it provides the company an access to raise a lot of money. This provides the company greater ability to grow and expand to the company, increases transparency in the company and share listing credibility allows the company to obtain better terms when looking for more borrowing of funds. The first modern IPO was of the Dutch East India Company.
The process of the IPO is of two parts. The first is the pre-marketing part of the offering and the second is the IPO itself. The company which is interested generally advertises to underwriters by providing private bids or it can also make a public statement to the company. The underwriters are chosen by the company and they lead the process of IPO. A company can choose any number of underwriters as they want, as there are many parts in an IPO which include due diligence, document preparation, marketing, filing, and issuance. The steps are –
- Appointment of Investment Banker / Underwriter – There are financial experts which carry out the process of IPO of a company. They act as a medium between the investors and the company.
- Registration of IPO – The company and the investment banker/underwriters, prepare a registration statement and a draft prospectus, which is known as Red herring Prospectus, which is the most important document for any retail investor to get all the details of the company financials and what are the future prospects of the company. All the companies have to submit the red herring prospectus to the Registrar of Companies at least 3 days before the bidding is open to the public. All the disclosures that are required by SEBI and the Companies Act are provided in Red Herring Prospectus.
- Cooling- Off Period – This is the time when SEBI verifies the facts which are provided by the company. It looks for all the errors, omissions, and discrepancies, and if all the things are correct, then SEBI approves the papers. If the approval of SEBI is received then only, the date of an IPO is set by the company.
- Application to Stock Exchange – The company files an application with the stock exchange when the company plans to float the issue and the company can list on the stock exchange.
- Creating a Buzz – The company creates a buzz in the market, before the issue and during the time of the filing for an IPO. The company every detail of an IPO through user-friendly means like through the finance websites or the broker’s app.
- Types of Issue Process – Fixed Price issue and Book Building issue.
- The fixed price issue is the price at which the shares are sold and allotment is made to the investors in advance.
- In the book building issue, the issuer offers a range within which the investors can bid for shares available for the general public. The final price is decided after the bidding is closed.
- The businesses ensure that the company’s internal investors don’t invest their money in the IPO, to increase their personal share value.
- The shares are sold in the primary market and the money is collected from the investors. Generally, the investing period is of 3 working days for any investor. The shares are allotted to the bidders within 10 days of the last date of bidding.