“IPO” you must hear about this amazing word and you may be confuse about what is IPO ? , What is the full Form of IPO ? , How to invest in IPO ?
In this post, we will learn all about the IPO, So lets start with our First Question what is the full form of IPO ?
Full Form of IPO
Basically, the full form of IPO is Initial Public Offering. IPO’s are the equity of the company which a company first time issue in the market and why they issue ? we will cover it below.
Friends, out of us, many people wants to invest in IPO.
What is IPO?
Initial Public Offering Whenever a company wants to raise money from the public then it has to register in the list of stock market , that is called IPO
.Now we want to invest in IPO, but we don’t know the whole process of an IPO That’s why sometimes we are not able to invest. We have many questions that :-
- how do we have to invest in IPO ?
- How are the shares are allotted?
- What is a book building issue and what is a fixed price issue?
- What is the role of an investment banker and underwriter?
So I will try to answer all these questions in this aricle. We will understand the whole process of IPO in this article. If we want to invest or trade in shares,
then where do we have to open the Demat account for that I would recommend that you should open your account with any discount broker Where brokerage charges are minimal And delivery charges are zero Latest offers,
I would recommend you to open your demat account from India’s best broker Upstox here.
Stages of Funding
Now before understanding the process of IPO, First, we have to understand that why any company require IPO We have to understand the stages of its funding I have covered the stages of funding in a post in detail earlier Here we will cover this in brief
Stage 1, any company gets started with promoters fund. This means the savings of founders, they take money from friends and family members
In stage 2, when the company grows, then angel investors invest money. Angel investors means private investors which can be a institution, can be a person etc.
In stage 3, there comes venture capital firm and private equity firm Who invests money
Stage 4 is of the IPO, called Initial Public Offering.
What happens in Initial Public Offering Stock exchange means Bombay Stock Exchange or National Stock Exchange Company gets listed Some investors invest in IPO, we call them investors . These investors can be of different types.
They can be institutional investors and non-institutional investors . We will talk about them soon.
Methods of Raising Funds
Here comes our next question : – Why does IPO is required? This is a simple thing if
1. A company wants to raise money or fund Then IPO is a very promising way of raising equity funds.
2.The second way is of raising debt funds Now this company raised private equity means until it was not listed. It has already raised funds from some private investors.
3. The third method is IPO (Initial Public Offering).
Reason of IPO
After second way, it has come on that stage where private equity investors cannot invest that much money Now the help of the public is needed Because in public there are more number of investors When the number of investors is more, then institutional investors can be tapped Like mutual funds, pension funds They have a huge amount of money For tapping big funds, IPO is brought and its main reason is : –
1. when a company wants to expand Then it requires a lot of money
2. It may be possible that it has taken debt in the past, it has taken loans Or it has some liabilities and it wants to finish them up. That too can be paid off with funds raised by IPO.
3. Third is exit to the previous investors Like these old investors, angel investors, venture capitals, and PE firms. Some of them may want to exit, So when the company gets listed on the stock exchange. Liquidity gets increased here because the number of investors increases, then if they want to exit they can exit.
So we understood why the IPO is required by the company. What are the reasons ?
Process Of IPO
Now we will understand the process of IPO. Process means work done step by step.
Hiring of an Underwriter or Investment Bank
The first step in the process of IPO is that any company that wants to bring a public issue Hires an investment bank, The investment bank is called a merchant bank.
For example, we will consider ABC Toys Ltd. If this company wants to get listed in some stock exchange. Let’s say it hires an XYZ Capital, So investment banks can be of what types?
On today’s date all the major banks whether it is ICICI, Axis, SBI, or HDFC. All these have their investment bank arms . Which do mergers and acquisitions or bring IPO,So it is also the job of i-bank, to bring IPO.
Any company that wants to hire an investment bank. Then what will it see their reputation, how was their track records in raising the funds from IPO ?
- How is their quality of research?
- How do they do their pricing?
- how do they do their valuation of companies?
Other than this,
- how is their distribution how many institutional investors do they have tie-up with? or
- how good they can do the marketing to retail investors
- How good marketing can they do to the noninstitutional investors?
Other than this, prior relationships It may be possible that a company has a prior relationship with investment banks .That’s why any company would want to hire a good investment bank .
2. Legal Formalities
The next step is due diligence and filings Assume this company has hired an XYZ Capital After that, this company will do all the due diligence process and legal process.
What comes under this? The first is underwriting, Underwriting is the most important step. Understand the meaning of underwriting.
Here XYZ Capital may say that they can give the whole firm commitment. What does this firm commitment mean here?
We are saying that if we raise 1000 crores for you from the market. Then we are providing a guarantee that if the money falls short in that 1000 crores, We will invest money from our pockets If there is some gain, then it is ours.
So we can say in a way that in underwriting, XYZ Capital is saying to ABC Toys Ltd. That we have taken the issue from your side. Now we have become its sellers, Now we will sell it in the market at our prices.The gain is also ours, and the shortfall or the loss is also ours.
The second way is of the best efforts commitment Company do best efforts commitment or best efforts agreement XYZ Capital will say to ABC Toys that,
It is our responsibility that we will tell you the issue price. We will do your valuation, we will do your pricing And we will do its distribution. But it is not our guarantee What will be the response, how much will be the subscription
The third, that the company Assume the whole IPO is very big, and it has to raise 10 thousand crores or 15 thousand crores.
It may possible that one investment bank will not handle it. What will he do then? He will make a syndicate, which we call the syndicate underwriting.
They will hire multiple banks or multiple managers And allocate some portion to them Let’s say they will tell Bank “A” to raise 1000 crores. You sell 1000 crores IPOs.
By doing this, they may appoint 10 different banks and they will take some portion to themselves. The main book manager or book runner is called the lead manager And the rest of them are participant managers in IPO And this is called syndicate underwriting.
Red Herring Prospectus
So, underwriting is done After that Red Herring Prospectus is a document in which all the details of the company are written.
Important details which are in a Red Herring Prospectus is : –
- Detail of its promoter and business
- What are its competitive advantages?
- What is their capital structure?
- What are their future business plans?
- What are the risks and opportunities from other businesses?
- What is their past financial data (Statement of Profit & Loss + Balance Sheet)?
- How was the growth?
Management wants to show you the prediction of upcoming growth,Whatever details the company wants to give about any business. So, that they can maintain the transparency.
Because investor will invest money only when they have all the information of the company.
So, all these details come under Red Hierring Prospectus and it is the job of XYZ Capital to make this Red Hierring Prospectus.
It is the job of this investment bank .
The third responsibility that comes here is compliance and filings. This means if there are some guidelines of SEBI or some compliance National Stock Exchange or Bombay Stock Exchange,
wherever they are listing. There is a Securities Contract Act Or there are Companies Act Or whatever regulations or listings regulations.
Specifically, It is very important to comply with them all Listing requirements are quite stringent It takes a lot of time.
This job too is handled by an investment bank Whoever has this kind of expertise.
Pricing of IPO
The third process is our pricing. Now, whose responsibility is this? This too is the responsibility of XYZ Capital, which means i-bank .
In this, the valuation of the company is put.
For example, let’s say XYZ Capital is putting the valuation of ABC Toys The total valuation is put to 10 thousand crores.
Now, we say the total valuation of 10 thousand crores.
Out of this, we want to dilute 20 % And what is the meaning of 20 %. We will raise the fund of 2000 crores out of this.
This means we will sell the 20 % shares out of 80% shares will remain with the promoters and existing investors.
20% will go to public And what is the value of that 20%? -2000 crores So what will we say? How much is the issue size?
2000 crores is the issue size . This money will be raised from the public ,So for raising this 2000 crores, we have to issue many numbers of shares
And we have to allocate price to every share. Let’s say the issue price of one share is 200 Rs And the number of shares is 10 crores.
If you multiple 10 crores with 200, then the fund of 2000 crores will be raised And see if any investors say.
I want to invest only 1000 Rs in this IPO. Then he cannot do this A minimum lot size is kept here., So no one can say that I want to purchase only 2 shares of this company.
I want to purchase only 4 shares Whatever is the minimum lot size Or whatever the company fixes as minimum lot size.
You can invest a minimum of that. For example, assuming the lot size of 50 shares. That minimum 50 shares or you can do the bookings in its multiples only And can buy these shares .
So 50, 100, 150, you can do bidding in this way only .So what is the minimum investment here?
If you multiply 50 shares into 200 Rs, Then the minimum investment here is 10000 Rs. There exist two types of issues in pricing.
- Fixed Price Issue
- Book Building Issue
The first is the fixed price issue, in which XYZ Capitals says that We have fixed the issue price as 200 Rs Whoever wants to invest, -invest Whoever doesn’t want to invest, -then don’t.
If we don’t get a good response then we will know that pricing was not good. But in this case, it may take some extra time.
If the response is not good, It may possible that the valuation of the company was not up to the mark. So, more complications may arise.
So, nowadays the preferred method is a book building issue.
What happens in book building issue is that Price Band is kept . So, this XYZ Capital will say that we are keeping a Price Band of 180 to 200 Rs.
In this, we also see the performance of the market. How is the response of the market.
They go to different institutions or go to non-institutional investors who can invest a big amount. So, they take responses from them, Even retail investors can also bid.
Once all the bids are collected, after that in that price band. Anything can be assigned as the final price.
So investors have to be ready that whatever will be the final price. In that, whatever we had bid, whatever amount of shares.
We are ready to purchase that and in this price band, the lower amount is called floor price And the higher amount is cap price.
Note : – The maximum difference between both of them can be 20%. I will cover book building issue in more detail in another post.
Distribution And Marketing
Once the pricing is done. The next is our distribution How the distribution is done? ABC Toys and XYZ Capital will do it together.
What is the meaning of distribution or allotment? Now we have to market our issue.
We have to sell this issue. We will sell it to different people. There are qualified institutional buyers like mutual funds, pension funds.They manage a lot of money.
So, they will approach QIB (Qualified Institutional Buyer), they will market there Some roadshows will be planned Non-institutional investors will be attracted Non-institutional investors are your high net worth, individuals.
They invest a quite large amount.
After that, the third category is our retail investors. So, all these three types of investors have to do marketing ABC Toys and XYZ Capitals will do it together.
So, here comes your distribution network Main responsibility is definitely of i-bank.
Once the distribution is done, the application process starts.
Applications are filled by the applicants who are investors.
The qualified institutional buyers or non institutional investors and retail investors. Interest arose in them.
They think that they are getting a very good valuation and they liked the future growth.
Then the application will start and it may possible that applications will be more Sometimes there is an oversubscription.
Assume there is an issue price only and they want to raise 2000 crores and there is the issue of 10 crore shares and the applications may come for 20 crores shares And it is also possible that there is 5 times subscription.
Recently the IPO came for IRCTC, it was subscribed 110 times .
Allotment of Shares
So, in the case where there is so much oversubscription. Everyone doesn’t need to get shares.
So here our next process is allotment of the shares.
What is the meaning of share allotment?
XYZ Capital, there is a quota of QIB (Qualified Institutional Buyer). If we talk about today then there is a 50% quota of QIB.
In non institutional investors, there is approx a 15% quota
And retail investors have a 35% quota,
According to that these shares are allotted.
Listing On Stock Exchange
Then our final step is listing on the stock exchange. There is National Stock Exchange and Bombay Stock Exchange Wherever the company wants to get listed.
It will get listed there How much time will this process take? We will understand this .
The issue comes and the bid and offer is opened. Generally, you will see an issue gets opened for 5 days.
Back then, in IRCTC it was opened for 3 or 4 days. We have seen in the case of Avenue Super Market, it was opened for 3 or 4 days.
On average any issue is open for 3 to 5 days.All the applications are collected in this.
Nowadays, these applications are also very simplified SEBI has allowed. The UPI system also in this Earlier there were only ASBA applications.
ASBA means Applications Supported by Blocked Amount. This means an amount in your account was blocked And if you are allotted shares in the IPO only then the amount will be deducted from your account Till then you will get interest on that money.
But now it is very easy with UPI payments Earlier you were not able to directly invest through your stockbroker in IPO.
But now you can invest through your stockbroker also.
Assume you have installed the BHIM app, and you have UPI ID Then you can directly apply in the IPO through that And when there is closing, assume there was open of IPO for 3 or 5 days.
let’s say the closing date was 1 October From this closing date, you have to get listed on the stock exchange within 3 days.
For what these 3 days are for? The company which is issuing will get funds.
Second, whoever is to be refunded will be refunded And to whom, the shares are to be allotted will be allotted.
This process should be finished within 3 days. Earlier this was allowed for 6 days But SEBI has done it for 3 days.
So the process of IPO is getting fast If we talk about developed countries, then their listings get done within a day. So, what is the benefit here?
1.The issuer company is getting capital very fast. The sooner the IPO process completes, the sooner they will access the capital.
2. The second benefit to the investor is that early liquidity This means the listings on the stock exchange will be fast And if we want to exit, then he can exit and the new buyer who wants to purchase this IPO.
Assume he did not get a chance in IPO But if he wants to purchase that stock then he can do it fast.
I hope the whole process of IPO is cleared for you.
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I hope you enjoy this article, let’s take a quick revision of that lets start : –
- Full form of IPO
- what is IPO
- Stages of Funding
- Method of Funding
- Reason of IPO
- Process of IPO
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