Initial Public Offering (IPO)
- IPO means Initial Public offering.
- IPO is the Process to raise capital from investors by a public limited company, offering its shares to general public for the very first Time.
- Through Mode of IPO a company gets his name listed on Stock Exchange.
- This can be for Specific purpose or for general corporate purpose like to meet its working Capital Requirements.
- An IPO can be Mainstream IPO or SME IPO.
* Right now BSE and NSE both are offering SME Platform to Small and Medium enterprises with less compliance and formalities to list their stocks on exhange.
Process of IPO
First Company is started as a Pvt. Ltd. company with small numbers of members which are basically its founders, friends and family along with professional investors.
When its business starts growing & when company believe it can expand its business and increase its profit margins but due to liquidity constraints is unable to do so, also it has confidence that it can carry the burden and responsibilities of public shareholders than it can choose to go for public through IPO.
To go public, company has to hire Investment bankers who can handle its IPO. The Investment bankers handles the complete process with due diligence from Draft Red Herring Prospectus (DRHP) to allotment of shares. They file the registration statement with SEC(Security Exchange Commission), SEC after thorough scrutiny of disclosed information allows a period to announce its IPO.
The Price of shares in IPO is fixed through underwriters after due diligence.
Why Companies offer IPO?
Availability of cheaper funds through IPO
An IPO provides the company access to raising funds for its business requirements at minimum cost giving the company greater ability to grow and expand.
Trading of stocks in open market means increased liquidity.
Brand Going public increases the Brand recognition and it means company has gained success to make it possible to flash its name on stock exchange.
How to decide whether to Invest in IPO or Not?
Investment decision, whether to invest in a IPO or not is purely based on Company profile, financial and ascertaining the growth potential of a company.
Decision varies company to company and IPO to IPO.
Factors considered before investment in IPO
As company bringing the IPO is a new company for stock market, you need to refer its Draft Red Herring Prospectus (DRHP) and Red Herring Prospectus (RHP) to check the brief of companies Profile before making an IPO Decision.
Do ensure to check the history and past potential of underwriters, Check the last IPO underwrite by the underwriter and its listing performance, how it is performing on exchange and how much listing gain it has given. Some small investment bankers are just willing to underwrite any IPO just to make money and they don’t care whether it is giving any gain or is listing at discounts. Beware of such IPOs and stay away.
People who buy stocks of the company going public and sell off on the secondary market in the view to get quick money are called flippers. Flipping initiates the trading activity.
Mainly this transition phase is the time for private investors to cash in and earn the returns they were expecting. They have the choice either to sell there share or keep it in full or in part, here comes the part for offer of sale or additional issuance of equity capital.
OFS (Offer for Sale)
In case the private investors are selling there share through the mode of listing and company is not getting anything from this offer, then same is called offer of sale by selling shareholders.
Additional issuance of capital
When the company is issuing fresh shares to public by diluting/reducing the capital of private shareholders than the company is getting the issue proceeds which can be used for objects stated in prospectus is called additional issuance of capital.
The public market opens up a huge opportunity for general public to buy the shares of listing company by way of IPO. Public consists of Qualified institutional buyers (QIB), Retail investors and Non institutional investors (NII). The number of shares offered and price band of issue is the basic criteria for new shareholders to choose to invest in an IPO.