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The term IPO stands for Initial Public Offer and it is in practice in the primary market of shares and stocks. It is the first issue of shares of a company to the public. An Initial Public Offering (IPO) is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.
IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value. In short we can say that IPO is the medium through which a company raises equity capital from the public. By this process it also gets listed on the stock exchange
Company with the help of lead managers decides the price or price band of an IPO. Merchant bankers or syndicate members are acting as the lead managers of companies.
Registrar plays an important role in an IPO process. Their main job involves processing of IPO applications, allocation of shares to the applicants on the guidelines provided by SEBI, processing refunds and also allocating shares in the account of the applicants.
Lead managers are the independent financial institutions which are appointed by the companies generally involving big IPO’s. Their main responsibility is to initiate the IPO process, help the company in road shows, creating draft offer document and also getting the same approved by the SEBI and Stock exchanges and also helping the company in getting its shares listed on the stock exchanges.
There are three stages in the life cycle of an IPO Prospectus such as ;
• Draft offer document
• Offer document
• Red Herring prospectus
Issuing company and the Book building lead managers prepare the draft offer document which is submitted to SEBI for the review. Now the SEBI may ask the lead managers to either make any changes if required or approve it.
Once the Draft offer document gets cleared by SEBI it becomes offer document, offer document is a modified version of Draft offer document after SEBI’s suggestion
Once the offer document gets clearance from SEBI the issuing company adds number of shares and the price on the document which is then offered to the public. The issue prospectus is now called the red herring prospectus.
There are eight major steps in the life cycle of an IPO such as ;
• IPO process initialization
• Pre Issue Role - Part 1
• Prospectus Review
• Pre Issue Role - Part 2
• Bidding for the public issue
• Price Fixing
• Processing IPO Applications
• Stock Listing
Price at which the securities are offered/ allotted is known in advance to the investor
Price at which securities will be offered/ allotted is not known in advance to the investor. Only an indicative price range is known
Floor Price is the minimum price (lower level) at which bids can be made for an IPO
Cut off price refers to the price which is decided by the issuer i.e. the price at which the issuer decides to make the allotment and it indicates that the applicant is ready to accept the price decided by the issuer if he/she mentions cut off prices on the share application form.