An initial public offering (IPO), otherwise known as stock market launch, is a public offering in which shares of a company are sold to investors.
Initial public offerings can be used to raise new capital for companies to gain more funding to monetize the investments of shareholders
An IPO is a crucial step for a rising company as it is a gateway to raise additional fundings. This allows the company to grow beyond its initial setup and additionally leads to better transparency and credibility that can be a factor in attracting new investors and when seeking to borrow more funds in the future.
An initial public offering of a company is priced to underwrite due diligence. When a company is listed publicly, the previous shares that were privately owned would be publicly traded and the existing private shareholders’s shares would be equal to public shares.
How does an Initial Public Offerings work?
Before an IPO a company is a private entity not subject to trade in a stock market. The private company at first consists of a small number of shareholders like the founders, family and some professional investors
When the company reaches a stage in its growth where it believes it can stand the rigorous regulations of a financial authority (In India’s case the SEBI), it will begin to advertise its interest in going public, as in being listed in a stock exchange.
The steps of issuing an IPO can be condensed into the following:
Underwriters present proposals and valuations discussing their services, the best type of security to issue, offering price, amount of shares, and estimated time frame for the market offering.
The company chooses its underwriters and formally agrees to underwriting terms through an underwriting agreement.
Form a board of directors.
Ensure processes for reporting auditable financial and accounting information every quarter.
The company issues its shares on an IPO date.
Some post-IPO provisions may be instituted.
Advantages of an IPO:
Increasing and diversifying equity base
Cheaper avenues of raising capital
More exposure, prestige and enhanced public image
Ability to attract and hire better employees and the management to oversee them through liquidity participation
To enable acquisitions
Creating multiple financing opportunity through equity, convertible debt etc
Disadvantages of an IPO:
Rise in marketing and accounting costs that will munt as time goes on
It is necessary to disclose sensitive financial and business information.
More effort and attention is required of the management to ensure an IPO goes smoothly.
Chances of additional funding might not be acquired in case the company does not perform well
Public disclosure of information might be exploited by competitors or even customers
The initial shareholders may lose independence as new ones will come in through the ability to buy new shares.
The company will be exposed to risk of litigation, private securities and other forms of derivative actions.
Q.1 What is an Initial Public Offering?
An initial public offering (IPO) is an offering of fresh shares to the public with a view to listing the company in the stock exchanges. The IPO market is also called the primary market and is to seen as distinct from the secondary market.
Q.2 Why are IPOs conducted?
Essentially IPOs are done for one of the two reasons. Firstly, an IPO is intended to raise fresh capital to finance the expansion / diversification plans of the company. An IPO can also be in the form of an offer for sale where the IPO is done to give an exit route to early investors in the company.
Q.3 Can I send multiple applications for one IPO?
No, you cannot put multiple applications for an IPO and there can only be one application under one PAN number. If there 5 members in your family then you can put in 5 applications. But duplicate applications in the same PAN is barred and your application is likely to be rejected.
Q.4 What are categories in which IPO allotment applications can be made?
IPO allotments are typically made under 3 broad categories viz. Retail, Non-Institutional (HNI category) and Qualified Institutional Buyers (QIB). There is a 35% allocation to retail in book built issues and 50% for QIBs. In addition, some IPOs also have a special allocation to employees.
Q.5 What are the Price bands applicable for an IPO?
Price bands are applicable in case of book built issues. In a book built issue, the issuer decides on a price band, which will form the basis for the price discovery of the IPO. All investors necessarily need to bid within the band only.
Q.6 What is minimum number of days for which bid should remain open in book building?
A book built issue should keep its bidding open for a minimum number of 3 days and a maximum number of 10 days from the start of the issue. Here 3 days mean 3 working days and exclude Saturdays, Sundays and other holidays.
Q.7 What is the difference between an Initial Public issue (IPO) and a follow-on public offer (FPO)?
An initial public offer, as the name suggests is an issue to raise capital from the public for the first time. But then companies continuously need capital to fund their expansion and their diversification activities. When a second or third issue is brought out it is a follow-on public offer (FPO).
Q.8 What is the difference between “Fixed price issue” and “Book Built issue”?
In a fixed price issue, the price of the IPO is fixed in advance by the issuer and the merchant bankers and all applicants can only apply at that price. In a book built, normally a price band or price range is indicated. Investors are free to bid within this price band and your allocation will depend on which is the final discovered price. In case you do not want to bid, you can just mention cut-off price which means you will be deemed to have applied at the discovered price only.
Q.9 What is the Role of a Registrar in an IPO?
The registrar to an IPO is the official record keeper of the IPO. The issue of share certificates, creating the consolidated list of shareholders, allotment of shares and transfer of proportionate shares to the demat account of the applicant are all handled by the registrar. In India Karvy is one of the largest players in the registry business.
Q.10 What is the time deadline by which the allotment process would be completed?
Till Jan 2016, SEBI had offesssred 12 days for the completion of the IPO allotment process. Effective from Jan 2016, all IPO allotments in case of book-built issues have to be necessarily completed with 6 working days (effective it has been halved) from the date of the closure of the issue. This is considerably reduced the time for allotment and the lock-in of the funds of investors.
Q.11 What is the time deadline by which the refund order would be dispatched?
Normally, the allotment process is completed within 5 working days in case of book-built IPOs. Once the allotment process is completed, the refund orders are also processed at the same time. In case of offline applications, the cheques are despatched with 8-10 days of the issue closure. In case of online banking interface, you can get a direct ECS credit to your bank account. In case of ASBA applications, the lien on your account to the extent of the refund will be removed automatically.
Q.12 Where can I check allotment of shares through IPO?
Normally, the registrar and the DPs upload the online access to the online allotment status on their website which you can access through proper authentication. For the same of simplicity, the issuer and the merchant banker to the issue will also provide a hyper link on their website wherein you can go in and check the allotment status.
Q.13 Where can I check the Refunds for non-allotted shares / Cancelled order / lower revised orders?
If you have applied offline or if you have applied online, the IPO allotment status is uploaded by the registrar on its website. For e.g. Karvy regularly uploads the latest allotment status (whether allotment, rejected or partially allotted) on its website once the allotment is completed.
Q.14 How do I know if I am allotted the shares? And by what timeframe will I get a refund if I am not allotted?
The information can be check in the online interface of the registrar. You can also check with your DP account if the credit has been received. You can also register for the allotment status to be received via SMS on your mobile. Normally, refunds are processed with 8 days of the closer of the issue and disbursed accordingly.
Q.15 Whom do I approach if I have grievances with respect to the non-receipt of shares, delay in refund etc?
You can file a complaint with your broker through whom you applied. Ideally, IPO issues are best taken up with the registrar and these registrars have a dedicated grievance redressal mechanism to take care of such requirements. In a worst-case scenario, if your grievance is still not resolved you can file a complaint with SEBI.
Q.16 Can I cancel my Bid for applied IPO order?
You are allowed to cancel your IPO bid at any time before the closure of the issue. Once the issue is closed, then you cannot cancel or withdraw the bid. Till the closure of the IPO, you can cancel you bid any number of times and there are no restrictions.
Q.17 What is Book Building and how does it work?
A book building is a method of an IPO wherein you discover the price of the IPO through a process called book building. The price is discovered at the price where there is maximum demand. Bids are segregated into Retail, Non-Institutional and QIB categories and the oversubscription in each of the categories combined determines the basis of allotment.
Q.18 Which members will be allowed to participate in book building of issue?
Book building issues can be logged in through the terminals of brokers who are registered with SEBI. Only authorized members of the stock exchange are permitted to participate in uploading the bids.
Q.19 What is a bid lot?
A bid lot is the minimum number of shares that can be bid for. For example, in case of the retail category, the IPO at a price of Rs.95 may fix 10 shares as the minimum bid lot. You can only bid in the book-built issue for a minimum of 10 shares. You are not permitted to bid for 3 shares or 5 shares in this case.
Q.20 What is a price band?
The price band is the price range that is decided by the Book Built issue. When you bid for an IPO, you must bid within the range only. If the price band is 90-96 for an IPO then any bid between 90 and 96 is a valid bid. If you bid at 88, then it will be rejected. In case you bid at 93 and if the final discovered price is 96 then you will not be allotted any shares.
Q.21 What is cut-off price?
If the bidder bids at a price and the final discovered price is higher, then nil shares will be allotted. Instead, investors can choose to bid at the cut off price. In this case, they will pay equal to the cap price and the balance if any will be refunded. The facility to bid at the cut-off price is only available for investors bidding under the retail category (less than Rs.2 lakhs)
Q.22 What is price discovery?
Price discovery is the process by which the book building process is used to identify the price at which the issue is likely to be fully subscribed. When the issue gets substantially oversubscribed, the company normally discovered price is at the upper end of the price band.