Initial Public Offering : Introduction
Initial Public Offering is the process by which company can go public by issuing new share for the first time or existing share holders share part of their shareholding for the first time to the public .Economic growth requires capital investment . Bank are the primary sources for capital for firms . with the modernization of Indian economy alternate sources of raising capital through debt and equity are very popular methods for raising capitals . funds raising through public issue is the principal route for business growth . Majority of companies that goes public has shown remarkable growth .
WHAT IS IPO ?
When a Company want to raise capital it sells its share to the public . Initial Public Offering is the process by which company can go public by issuing new share for the first time or existing shareholders share part of their shareholding for the first time to the public .
The company who offer share to the public are called issuer . the company that issue share can be a new company or a old company .It can be a small or a big company .
Once IPO is offered by a company to the public it is subscribed by the investor and the companies receives money from the investor for the first time in exchange of share offered .
The investor who invest in the share of the company for the first time expect a return through capital growth , stock price appreciation and dividend income .
After IPOs subscription share get listed on the stock exchange are traded in open market .
Advantage of Going Public ;–
Money raised through public issue can be utilized by the companies either for the growth , expansion , acquisition ,diversification or even to meet his working capital requirements .
Increasing liquidity for equity holders .
To Pay off existing debt .
Increase in share market .
Strengthening and diversifying equity Base .
Different type of public Issue
INITIAL PUBLIC OFFERING (IPO ) ; Ipo is a type of issue where an unlisted company raise capital by making fresh issue of securities or offering its existing securities for sale to the public for the first time .
Further public offer (FPO )/ Follow on public Offer (FPO) ; when a listed company wants additional capital , it makes either a fresh issue of securities
Or an offer for sale exisiting securities to the public it is called a follow on public offer .
Offer for Sale (OFS ) – Institutional investor . Venture Funds . private funds invest in a company at its nascent stage .Once the companies grows big these investors sell their share to the public through the issue of offer documents and subsequently share got listed on the stock exchange .offer for sale is the special mechanism by which promoters sell their stake in the market .
Both retails and institutional investor can Invest in an OFS and buy shares of the company .
What are the benefits of Public offering ; –
Companies come up with an IPO for various Funding and Non Funding purposes .The primary reasons for issuing IPO is raising capital quickly from a large number of investors .
Benefits of IPO ;
Cheaper and Easy access to capital
Capacity Expansion
Working capital requirements
Repay existing debt
Liquidity
Mergers and acquisitions
Product development
These are the primary goals of issuing IPOs .
Why Investor are interested in IPOs ?
From the investors point of view IPO are supposed to be undervalued and they can earn good profit in short term .Company offer IPO at lower price in order to attract large number of investors.
How does IPO works ?
Ipo is regulated by SEBI .Companies intended to issue IPO first register with SEBI .SEBI scrutinise the document submitted by the Company .
After completing all the formalities company fixes the share to be offered along with price band at which offer will made to the public .
Investor then subscribe or apply for the share of the company .Generally IPO are oversubscribed as Companies receive more applications than shares offered . In case of over subscription Company does partial allotment to the investors .After share are issued to the investors in the primary market . It gets listed in the secondary market or stock exchanges for trading .
What is the IPO procedure in India ?
Decision to go for IPO .
Appoint Investment Bank .
Registration with SEBI .
Publicly available for purchase .
Listing on Exchange
What are the categories of investor in IPO’s
Retail Individuals Investors ( RII ) ; –
This category of investors cannot apply or bid for than 2 ,00, 000 .
NRI’s who apply less then 2,00,000 are considered as Retail Individuals Investors .
High Net worth Individual ( HNI ) / Non Institutional Investors ( NIIs ) ;-
If the retails investors apply for more than 2,00,000 considered as HNI .
NIIs are the individuals investors , NRI ‘s Companies , trusts etc .who bid for more then 2,00,000 .they are not required to be registered with SEBI like RII .
Qualified Institutional Bidders (QIB ‘S )
QIBs are those institutional investor who have expertise and the financial strength to analyze and invest in the capital markets .
They are mostly financial institutions , Banks FII ‘s and Mutual funds , who are registered with SEBI.
Anchor Investors
Anchor investor introduced by SEBI in 2009 , refers to QIB making an application for a value of 10 Cr or more through the book – building process.
They invest in IPO before it opens to public , thereby attract investors and gain public confidence before IPO goes public .
In a book – built ,allocation of securities to retails individuals Investors (RIIs ) , Non Institutional Investors ( NII ) and Qualified Institutional Buyers (QIBs ) is in the ratio of 35 :15: 50 respectively .
In case of fixed price issue minimum 50% of the securities are required to be allocated to the retail individuals investors and balance to other investor including corporate bodies/ institutions irrespective of the number of share applied for .
Participants in an IPO ?
Issuers ; – Unlisted Companies and Listed Companies are the issuers of an IPO .
Intermediaries and participants ; – Merchant Bankers , Syndicate members , Underwriters , Depositaries , Stock Exchanges
Investors – Retail Individuals Investors , Non Institutional , Investors , QIBs
Ratings for an IPOs –
SEBI has made mandatory for all IPOs to obtain grading from at least one credit rating agencies registered with SEBI. This grade indicates the assesment of companies fundamental .these are generally grade from 1 to 5
Grade 1 . Poor fundamental
Grade 2. Below Average Fundamental
Grade 3 . Average Fundamental
Grade 4. Above Average Fundamental
Grade 5. Strong Fundamental
Does applying for IPO Guarantee an investors to receive Shares ?
There is no guarantee that investor will get any share at all , if applying for an IPO .if IPO is oversubscribed multiple times , this ratio shows how many applicants will receive single lot of shares among a certain number of applicants , for example ,ratio 1: 7 means only one out of seven applicants receive one lot of shares .
For how many days an issue is required to be kept open ?
For fixed price Issue ; 3 – 7 working days
For Book built public issues – 3 – 7 working days extendable by 3 days in case of a revision in the price band .
The investor is entitled to receive a confirmatory Allotement Note in case he has been alloted shares within 4- 5 working days from the closure of the issue. The registrar has to ensure that the demet credit or refund as applicable is completed withing 5 working days of the closure of the book built issue . the investor gets refund within 4 – 5 working days from the closure of the issue investors get refunds in an issue through various modes such as registered / ordinary post , Direct Credit ,Rtgs , ECS and NEFT .
Cut off system in the bidding process
Retails investors are allowed to invest in IPOs using the cutoff system which indicates their willingness to subscribe to share at any price discovered within the price band . However in case of applying at cut off price , shares will be allocated to retails investors at whatever is the final cut – off price .
What is ASBA ?
SEBI has made it mandatory for retails investors to apply for an IPO using ASBA (Application Supported by Blocked Amount ) , which authorize to block the application money in the bank account , for subscribing to an issue , Hence application money shall be debited from the bank account only if investor is selected for allotment .However , if shares are not allotted , the amount is unblocked immediately . The advantage of using ASBA is that investors continue to earn interest on the application money until shares are allotted.
