What is an IPO?
IPO stands for Initial Public Offer. An IPO is the open selling of a company's securities by the firm itself for public subscription at large. When a company wants to raise money, one of the ways it can do so is by selling its equity shares to the public. When the company comes out with the issue for the first time, it is referred to as IPO.
Once an IPO is offered to the public at large, it is subsequently subscribed and after the end of the subscription period, it gets listed on the stock exchanges. After the IPO, the shares get listed on the stock exchange and shareholders can further deal their shareholdings on the exchanges.
Why invest in an IPO?
Investing in an IPO makes a lot of sense as owning a share of a company is like owning a part of the company where you would be considered a shareholder and would be involved in company decisions as a shareholder. If you get to own a part of a company at a price that is the best possible price rather than buying in the secondary market. It allows you to be one of the first shareholders of the company. Besides this, you don't even need to follow up daily for a favorable price at which you would like to buy the share.
If you have the resources, you can gather information, analyze the risks and rewards involved in an investment opportunity, and make an informed decision.
What is an FPO?
FPO stands for Follow-on Public Offer. When a company raises additional capital (either through a fresh issue of securities to the public or an offer for sale to the public) via an offer document after an IPO has already been made, it is called an FPO.
Why do companies come out with IPO?
Most companies are started privately by their promoters. However, the promoter’s capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over the long term.
Thus, companies invite the public to contribute to the company's equity capital by issuing shares to individual investors. The best way to do so is to invite share capital from the public through an IPO. An IPO is an open offer made to the public to subscribe to the share capital of the company. Once the shares so offered are subscribed, the company allots shares to the applicants as per the rules and regulations laid down by SEBI.
Who is a Registrar?
A Registrar is a company/organization that has been appointed by a company for issuance of shares for public subscription and is assigned the task of accepting and processing share holder’s applications, carrying out communications with shareholders, and helping to resolve their grievances. In addition, the registrar also receives and processes requests for dematerialization and re-materialization. Moreover, the registrar also maintains an updated and accurate record of the shareholders of the designated company.
What is the role of a Registrar?
The role of a Registrar is to finalize the list of eligible allotments and to ensure that the corporate action to be credited to the demat accounts of the applicants is done and refunds are sent to those applicable in case of an IPO.
In an IPO, the Registrar works in close coordination with the Lead Manager to ensure that the flow of applications from collecting bank branches, processing of applications till the basis of allotment is finalized, and refund orders completed and securities listed.
What is meant by Primary and Secondary Market?
The primary market is the market where the company issues fresh securities (shares) to the public for subscription in order to raise capital. In this market, there is no trading of securities that takes place and shares are issued for the first time.
A secondary market refers to a marketplace where already listed securities are dealt with after being initially offered to the public in a primary market, originally listed on the stock exchange. Most of the stock exchange trading takes place in the secondary market. This market comprises of equity markets and debt markets.
The secondary market provides an efficient platform for trading of securities. For the management of a listed company, this market serves as a monitoring and control tool that enables the aggregation of information to further guide management decisions.
What is meant by the term Premium and Discount in a Security Market?
All securities that are issued to the Public for subscription are issued in certain denominations such as Rs.10 or Rs.100. These denominations are called the face value of the concerned security.
When a security is sold at a price above its face value, it is said to be at Premium and if it is sold at a price less than its face value, it is said to be at a Discount.
What is the Cut-Off Price?
In a Book building issue, the issuer indicates (in the prospectus) either the price band (in which the public can subscribe for the shares) or a floor price (the lowest price), the public can bid for that share.
The actual issue price can be any price within the price band or any price above the floor price. This issue price is called the 'Cut-Off Price'. The issuer and lead manager decide this price after considering the book-build prices and the investor's interest in the stock.
How do I apply for an IPO?
In order to apply for an IPO, you first need to have the following accounts:
1. Bank account with any bank
2. Demat Account
3. Trading Account
Once you have these accounts, you can either get the application forms from your broker or directly purchase the same from authorized dealers near stock exchanges. You can also apply an IPO online through the online application platforms provided by your broker. This would save you the time to fill up the application forms and sign cheques, and the hassle of going and submitting the forms.
What is meant by a Book Building Issue?
When the issue price of an IPO is discovered by gauging the demand for the shares in the market at various price points, it is called a Book-Building issue. In such an issue, the issuer fixes a price band within which the public can apply for shares rather than a fixed price at which the shares can applied.
The price band is determined on the basis of the company’s fundamentals, the performance of share prices of other companies in the same sector on bourses (market), and market surveys conducted by issue managers.
This kind of issue allows the issuer to assess the demand for the said shares and thus helps to discover an appropriate price at which the shares should be issued.
How is Book Building different from regular IPO?
Book Building is a process by which the demand for the securities (proposed to be issued by a company) is built up and the price of the security is assessed on the basis of bids obtained for the securities offered for subscription by the issuer.
Fixed Price issue or a regular IPO is that IPO where the company decides a particular price for the issue which is to be used for applying to those shares. These issues have a pre-defined price at which the shares will be issued.
What is the maximum time period that I would be intimated about an allotment to me?
As per SEBI guidelines, an investor should ideally get to know the status of allotment of shares or refund in case of non-allotment within a time period of 15 days from the date of issue closure. In case of any delay occurred, the issuer may pay interest of 15% per annum after the 15th day.
What if I don't get an allotment?
In case you don't get an allotment of shares in your favor, the application money that you had submitted along with the application form is refunded back to you either through a cheque or direct credit to your account with prior intimation about the same.
What are the common mistakes one should avoid while investing in an IPO?
While investing in an IPO, you should consider the following facts before you make your investment decision
Ignoring past performance of the company: You can get the information about the past performance of the company (who is the issuer of such shares) from any of the financial newspapers, research provided by your broker, other online sources & red herring prospectus of the issue which is available with the application form. Also, this red herring prospectus contains key information about the business carried out by the company, segment focus, how it intends to utilize the funds so collected, and more.
Ignoring key financial ratios: Look for the key financial ratios that may have an impact on the performance of the company, find out how the company intends to keep the balance of Equity and debt capital, what is the PE ratio, etc. This will give a clue as to what is the general approach of the company, revenue sources for the company, etc.
Neglecting other factors that will affect the performance of the company: Other than the ratios and past performance, you also need to be aware of the economic, political, and monetary factors that may affect the performance of the company.
