What is an IPO?

When a private company decides to go public, it does so by offering its shares to investors via an Initial public offering (IPO). It is the first sale of shares by a company to the public, institutional investors and HNIs. An IPO market is categorised as a primary market where firms look to access long term capital. It is in contrast to the secondary market where the shares exchange hands within the investor community and companies fulfil their short-term capital requirements.

IPO, in essence, is the process by which a private company turns public and gets its name listed on the stock exchange. The management of such companies are confident of their business model and are expecting that the IPO will elicit the interest of retail and other strategic investors and are also ready to undergo the rigours of the regulator.

Before we discuss how an IPO works, let’s know what makes a company eligible for an IPO. For listing on the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE), a company has to have a minimum paid-up capital of Rs 10 crore. Besides, the post-issue market capitalisation should not be below Rs 25 crore.

How does an Initial Public Offering (IPO) work?

A company aiming to go public hires an investment bank to handle the IPO. The investment bank and the company work out the financial details of the IPO in the underwriting agreement. Later, along with the underwriting agreement, they file the registration statement with the regulator. SEBI scrutinizes the disclosed information and after verification allots a date to announce the IPO.

What is the process of filing for an IPO?

  • A merchant banker or Book Running Lead Manager (BRLM) underwrites the company’s shares, buying all or some of the IPO shares and selling them to the public. The bank helps the company with the IPO process, assisting with the due diligence, DRHP and IPO roadshow. The underwriters bear the risk of the transaction.
  • Companies have to file for an IPO with the market regulator, SEBI. The application needs to include the documents listed for the IPO Vetting Process. It includes DRHP, details of the promoters and the company's annual reports. The initial listing fees is Rs 50,000. The subsequent annual listing fees depends on the paid-up share capital.
  • The underwriters then market the IPO. Usually prices are set below the actual price to create excitement among investors. Marketing is typically done through advertisements to inform people about the company's offering. This process is also called the IPO roadshow. Subsequently the price band is decided upon and the merchant banker or underwriter of the share offer decides the IPO price.
  • For three days, the company's shares are open to the public for subscription. On the listing day the company begins trading on the stock exchange at a listed price, which is based on market demand for the issue.

Read More Here: How to Buy IPO Online?

Advantages of filing an IPO

There are a number of advantages of a company choosing to change its status from a privately held to a public-listed company.

  • The foremost is to raise funds from a wider pool of investors
  • Merger and acquisition is easier for a listed firm
  • Listed firms gain visibility. They find space in the newspapers as investors keep looking for opportunities.

Disadvantages of filing an IPO

  • Listed companies are required to make their financial statements and accounts open to the public and comply with market regulations.
  • The company also has to bear more costs for accounting, marketing, and legal issues & services.

Things you should know before investing in an IPO

  • If you invested in an IPO, your investments are directly linked to the fortunes of that company.
  • This type of investment carries a higher risk and can offer huge returns too.
  • You should be aware that a company which offers its shares to the public is not indebted to reimburse the capital.
  • Usually, it is good to have some experience before investing in an IPO. Taking advice from a personal finance manager before investing may help you avoid trouble.
  • You require a demat account to invest in an IPO. You can look for a free demat account and start investing.

Conclusion

An IPO is a closely watched event. It may be a huge opportunity or may turn out to be a loss-making investment. Some IPOs may be overly hyped by investment banks which can lead to initial losses. However, the majority of IPOs are known for gaining in short-term trading. IPOs are known for having volatile opening day returns, which can attract investors looking to benefit from the discounts. Over the long-term, an IPO's price usually settles into a steady value. You can open a free demat account and bet on the latest IPO hitting the markets.

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