Initial Public Offering
People these days are becoming tech-savvy, and with that, they are opening up to investing. The millennials are searching for more unique avenues to grow their money. They are willing to explore varied platforms like being a stock trader, rather than sticking to the slow-growing safer mode which the previous generation preferred. Millennials are more accustomed to the internet, more exposed to the global world and they are better informed investors when compared to the generation that brought them up. Still there are a few things that you need to know before they begin investing, like you should know about the domain in which you are putting your money. One such section that confuses people is IPO, its intricacies, and the standard terms associated with it.
What is IPO: Meaning and Definition
Initial Public Offering, or IPO, is a unique process to convert a private company into a public company by issuing shares. The issuance of shares for the public allows the company to gather capital and an excellent opportunity for the general public to invest and earn returns on that investment.
Initially, a private company grows with its initial investors, founders, and stakeholders. When a company has achieved a specific goal where the management realises that they are stable enough to handle the SEC (Securities And Exchange Commission) regulations, grow and diversify using the general public's money, the company decides to offer an Initial Public Offering. Through this, the stake-holdership in the company is offered to the general public through shares.
About IPO - Primary & Secondary Market
Primary Market is where the company sells fresh stocks like IPO. This is the first instance where the investors contribute to the company, and the company's equity capital is made by funds accumulated by selling stocks in the primary market. Private placement and preferential allotment are two other ways in which stocks can be sold in the primary market after an IPO. In private placement, the company can offer stock to significant investors like banks, hedge funds. This could be done without making the shares available for the general public. In preferential allotment, the company can sell shares to select investors at a price which is not available in the market
Secondary Market is commonly known as a stock exchange. This is where the stocks that have been allocated in the primary market are resold and purchased further by new people. A secondary market is where the investors trade among themselves.
ALSO READ: Upcoming IPOS in 2021
Types of IPO
There are two types of IPOs. They are dependent upon the type of price generation the company or the underwriter is going for. These are of two types:
In Fixed Price Offering, the company decides on the price of the stocks initially, and any buyer or investor pays that amount per share to obtain the desired number of stocks.
In Book Building IPO, the company decides the price band of the forthcoming IPO where the floor price is the minimum, and the cap price is the maximum, and the bidding is done within this range. The price is set by the underwriter and the company's investors with surveys done on what would be the value of the share. The bids are made, and the selected investors get the stocks.
Why are IPOs generated? What is the need for launching IPOs?
There are only two reasons due to which a company issues an IPO. It is to raise capital or return money to the initial investors.
The company opens itself to public investors by releasing an IPO. The IPOs give them a greater domain for the amount of investment. They can raise much more money than they could ever raise by the private investors.
One other reason the company considers releasing an IPO in the future is that it attracts initial investors. The investors have an option to sell their stocks in the company and get a return on their initial investment.
Types of Investors
Investors are classified into three major categories. They include the following:
Qualified Institutional Buyers (QIB): These are big investment firms, mutual funds, a scheduled commercial bank, along with a few other institutions that have been registered with SEBI. Not more than 50% of the securities are reserved for this category in a case of book-built issue, minimum 75% of the securities in case of compulsory book-built issue and
Retail Individual Investor (RII): These are individual investors who apply or place bids for shares with a cumulative value not exceeding 2 lakh rupees. At least 35% of shares are allocated in this category in case of book-built issue and not more than 10% are allocated in case of compulsory book-built issue. At least 50% shares are allocated in case of fixed price issue.
Non-Institutional Investors: These are investors other than QIB and Retail investors. These include High Net worth Individuals (HNI) or corporate bodies. At least 15% of stocks are reserved for this section of investors in case of a book-built issue and not more than 15% in case of compulsory book-built issue.
What is the IPO Timeline?
The process of applying for an IPO and getting it allocated to your name with various procedures in between is known as the IPO timeline. The process, also known as the IPO calendar, has the following subdivisions:
- Open/Close Date: These are the opening dates and closing dates of the bidding process in IPOs. Any desiring bidders can apply or bid between these days.
- Allotment Date: Allotment date is when the allotment status is announced to the public by the registrar of the IPO.
- Refund Date: The application amount is frozen, and you cannot withdraw the amount you used to apply for the IPO. Based on the IPO's allocation, the date on which the refund is initiated for the people who didn’t get the IPO, is known as the refund date.
- Credit to Demat Account Date: This is different for different companies, but this is when you receive the credit of the applied IPO shares in your Demat account before the listing date of the shares of the company.
- Listing Date: It is also known as IPO listing.This is when the shares of a company are officially listed on the respective stock exchanges (secondary market) and available for trading.
How to check for upcoming IPOs?
Investors interested in allocating their money to IPOs can stay updated about the upcoming IPOs through various means. These means include the following:
- They can check the stock exchange websites and get news about the upcoming IPOs. Many stock exchanges have a dedicated section of IPOs where desiring investors can get information about the upcoming IPOs. These websites, in various cases, also provide the IPO calendar and the IPO prospectus.
- Another mode is various websites on the internet. Those websites will provide you with authentic news under the segments such as "new ipos" or "ipo list."
- The third avenue is to look on the official website of aggregators, brokers, stock market information websites, blogs, and so on. Discount brokers like 5paisa.com. provide the investors with complete information and analysis of the upcoming IPOs. You can check the IPO section on our website OR in our mobile trading app.
- Issuer: Issuer of an IPO is the company that issues the stocks to raise capital.
- Underwriter: Underwriter is a banker, financial institution, or broker who helps the company underwrite the IPO. These act as a broker medium between the public and the issuer.
- DRHP: It stands for Draft Red Herring Prospectus, also known as the offer document. It is a preliminary registration document prepared by the Investment bankers for the IPO issuing company in case of a book built issue. the document contains the financial and operational information of the company along with a few other information like why it is attempting to raise money.
- RHP: Red Herring Prospectus is the preliminary registration document that is filed with SEBI in a case of book built issue. It doesn’t contain the number of shares or the price of the shares being offered in an issue.
- Price Band: A price band is basically the lower price and the upper price per share with which the company would go public.
- Issue Size: The Issue size in an IPO means the number of shares issues multiplied by the amount of each share.
- Under Subscription: This is a condition when the number of shares applied by the public is less than the number of shares issued by the company.
- Oversubscription: This is a condition when a company receives more applications than the number of shares being offered by the public.
Things to remember while investing in an IPO
Investing in an IPO is usually a beneficial option, but before investing, you should keep the following things in mind:
- Study the company, its background, financials, future aspects before you invest in the IPO.
- Note the IPO locking Period. The locking period is a duration in which you cannot sell or trade the stocks after an initial investment.
- Always plan an investment strategy before investing in any IPO.