Understanding Basics of IPO – Initial Public Offering
An initial public offering or IPO is the first sale of shares or stock by the company to the public. It is also the first time for the company to raise the money from the public. In the other word if an unlisted company makes the public issue for the first time it is said to an IPO.
Well the basic reason for issuing an IPO is raising additional capital, it can either takes debt or sell any percentage of the ownership. Now if the company decides to sell ownership to the public it is engaging itself in an IPO. After issuing an IPO a private company becomes public limited.
The basic difference between raising capital through debt and through an IPO is that in case of debt one has to pay the original capital along with particular amount of interest agreed within the company and the bank whereas in case of an IPO capital raised does not have to be repaid back to the public as it is sold against a particular part of company’s ownership.
Well to issue an IPO a typical sequence of events are being followed:
- The company’s management selects one or more than one investment firms that acts as a prime participant in the firm’s IPO and also as an underwriter.
- Then company’s management and investment bank negotiate the deal. This deal generally include the amount of money a company can raise, the type of securities to be issued and details of underwriting agreement and other relevant details.
- Now once the deal is settled the investment bank puts together an offer document to filed with the SEBI. The details contain information about the offering as well as company’s financial information, management background etc. The SEBI then investigates and make sure that all the relevant information is disclosed. Once the SEBI approves the offering a date is set when the stocks are to be offered to the general public.
Apart from that there are many benefits for a company to go public. Small and medium size companies which are looking to further expand the business generally use the option of IPO as it provides them an opportunity to raise capital from market to expand the business or can be used to pay off the existing debts. It also creates the awareness in the market about the particular company thus in turn helps in getting to know a new group of people.
But, along with advantages, an IPO also carries some disadvantages. After going public, a company can no longer keep the information with itself since there is no sole owner of the company. Apart from that, for a small size public company, the cost of keeping along with new developments in regulations is quite difficult. The added pressure from the market can also affect the objectives of the company. At last, the loss of control and other problems due to new shareholders is one of the major problems which a private company turning public generally faces.
Other Relevant terms related:
Book building process: it is a process through which underwriter tries to determine at which price the IPO should be offered. To determine the price the underwriter determines the floor price (base price) and ceiling price and then try to create the price which is agreed by and rest of the process with the regulatory body is handled by the company and underwriter appointed by them.
Follow on public offering: share issued by a company already listed on a stock exchange is generally referred to follow on public offering.
Fast track issue (FTI): in an FTI a well established and complaint listed companies, in their follow on public offers and right issues, have to provide only rationalized disclosures but not comprehensive ones.
Preferential issue: when the companies issue securities to a select group of persons under section 81 of the companies Act ,1956 it is said preferential issue.
Direct public offering: A direct public offering (DPO), like the more traditional IPO, is a stock’s introduction to the stock market. The stock is offered to the public for the first time. Unlike an IPO, which utilizes an underwriter to sell shares to the public, DPO shares are purchased directly from the issuing company. Individual investors have limited opportunities to participate in IPOs, so DPOs give the average person a chance to invest in a public offering.
Apart from that there are few generally asked questions:
Can I change/revise the bid?
Yes the investor can change or revise the quantity or price in the bid using the form for changing/ revising the bid that is available along with the application form. However, the entire process of changing of revising the bids should be completed within the date of closure of the issue.
What are the grades in which IPO is categorized?
The grades are allocated on a 5-point scale; the lowest grade is Grade 1 and highest Grade 5. Following grades have various attributes associated with them
IPO grade 1: Poor fundamentals
IPO grade 2: Below- average fundamentals
IPO grade 3: Average fundamentals
IPO grade 4: Above-average fundamentals
IPO grade 5: Strong fundamentals
Is grading optional?
No grading is not optional. A company which has filed the draft offer document for its IPO with SEBI or any regulatory body within a stipulated period of time decided by the governing body.
Is IPO a good investment?
Well it differs from company to company and their varying objectives i.e. if a company wants to expand its business or to diverse its business for them being public is really a good option. But those who cannot bear with the dynamic change of the regulation and keeping themselves with the expectation of the public or disclosing the relevant information public for them it is not a best option.
If you liked this article, do share it with your friends, and don’t forget to subscribe us Email so that we can deliver our next article, right in your mailbox 🙂