IPO - Initial Public Offering

What is an IPO?

IPO stands for Initial Public Offering. When private companies invite the general public to subscribe to their shares, this issue of shares is called an Initial Public Offering (IPO). This means the company is no longer privately owned, but is owned by a variety of investors, some of whom are not involved with the day-to-day operations of the company -- these investors simply own some of the company's stock, which they purchased on the open market. Although IPOs can vary greatly from one company to another, and they require a long, expensive and complicated process, the IPO is basically a way for the company to make money based on expectations of future success and profit.

Types of IPO

Book Building and Fixed Price Issue are the two types of Initial Public Offerings (IPOs) through which a corporate can raise money in the capital market.

In a book building public issue the bids are received at different price levels and the demand for the issue is built up over a period of time. Depending upon the bids received at different price levels the issue price is ascertained. In a fixed price issue the issue price is pre ascertained by the issuer. In case of a fixed price issue the issue price is fixed.

Why do Company go for IPO?

The main purpose of an IPO is to raise capital for the corporation." Other than raising capital, the reasons may be:

1. Liquidation of the shares of the company so that the founders and the rest of the existing shareholders will be able to "cash out" and trade their shares for cash or other traded stocks (referred to as "exit event").

2. Expansion of the company into new territories or markets may require the company to become public, not only by means of more funding, but also by regulatory or marketing reasons. Being public is associated with credibility and accountability.

3. Expansion of the company either by acquisition or merger. Getting more money into the company allows the company to have more money to finance takeovers or mergers with other companies. Moreover, being public will allow the company to merge with private companies who want to become public without going through IPO (referred to as "reverse merger").

4. Levergaing future sales or business to create extra value for the company. In some cases, it is possible for a company to gain more money by pushing up the price of its traded shares more than by actual sales or business events. In the "happy dot com days" companies would buy other companies just because it created a good hype to their stock, eventhough the acquired company was closed shortly after that.

Issue Related Terms & FAQs?

Price Band: Price band indicates the different price levels within a given range in which the investor can enter his bid.

Floor Price: It is the lower end of the price band.

Cap Price: It is the upper end of the price band.

Offer Document: offer document means prospectus in case of a public issue, which is file with Registrar of companies (ROC) and stock exchanges. The offer document contains all relevant details pertaining to the issue upon which the investors can make his/her decision.

Draft Offer Document: means the offer document in the draft stage, which is filed with SEBI for its observations. The draft offer documents are filed with SEBI at least 21 days prior to filing the offer document with ROC and Exchange.

SEBI ROLE: Any company making a public issue or a listed company making a rights issue of value more then Rs 50 Lakhs is required to file a draft offer document with SEBI for its observations. The company can proceed further only after receiving observations from SEBI. The validity of SEBI observation is 3 months only i.e the company has to open its issue within 3 months period.

Cut off Price: In case of public issues the actual discovered price/ issue price can be anything between a given price band. The discovered issue price is called the cut off price.

Basis of Allotment: The allotment in case of QIB category is on a discretionary basis while in case of Retail and Non-QIB(HNI) category the allotment is on a proportionate basis.