Introduction

The process by which any corporate raises funds in the primary market to achieve their business goals from the general public by selling fresh shares of stock to them for the first time. This move makes any private company a public company. Now, we will try to understand about IPO in depth by this article.

Hindi: इस लेख को हिंदी में पढ़ें।

IPO – Definition ::

Any private company initially grows its business by utilizing the funds provided by friends, family, founders, angel investors, and banks. When a company realizes it has achieved its specific goals and to achieve other goals like business expansion in other countries or regions, and reducing high-cost debt it needs to tap into public investors. This is the phase when the company raises funds to achieve its business goals, from the general public by selling fresh shares of stock.

IPO – Primary & Secondary Market ::

The primary market is the market which is used by the companies for raising fresh capital by selling fresh shares of stock to the public for the first time like IPO. This is the first time when investors contribute to the company and the company’s capital is made by funds collected by selling stocks in the primary market.

The Secondary market also known as a stock exchange is a place where the buying and selling of, stocks that are allocated on the primary market takes place. This is the market where traders trade among themselves.

IPO Types ::

There are two types of IPO, Fixed price offering and book building offering.

In the fixed-price offering, the securities are offered at a fixed price by the companies initially and any buyer pays that amount per share to get the desired number of stocks of the company.

In book building offering a price range has been decided by the company and the bidding happens in this range only. The lowest price in this range is referred to as floor price and the highest is referred to as cap price. The Final decision about the price of the stocks is made by these bids only.

IPO – The Process ::

Sequence of the steps involved in the IPO are as follows:

1. A company decides to raise funds in the primary market to achieve its business goals.
2. The company appoints merchant bankers to assist in the process of IPO.
3. Apply to SEBI with documents detailing the company’s work, the need to go public, and financial details of the company.
4. After getting an initial nod from SEBI, the company prepares DRHP(draft Red Herring Prospectus) which gets circulated to the public.
5. Marketing the IPO with the help of TV, Print Media, Digital Media, etc to increase awareness about the IPO. This process is also called an IPO roadshow.
6. The price at which the shares will be listed is decided after the closure happens(deciding the price of the stock by a fixed band or book-building process).
7. The company gets listed on the stock exchange.

Why companies offer IPOs ::

The primary reason why companies decide to go for an IPO is to raise capital to achieve their company goals like expansion, reducing debts, returning money to the initial investors by giving them an exit, etc. The reasons are mentioned below in detail :

1. To raise capital to fund their expansion plans. By going public companies tap into the public and investors and raise the necessary capital to expand into new locations or countries, develop new products, etc.
2. To reduce debts by using the funds to pay off loans if any exist.
3. Provides an exit strategy for existing shareholders and by this shareholders gain significantly by selling their stocks.
4. By listing on the stock market, companies increase their visibility to gain more potential customers and business opportunities.

Note: The disclosure of the proposed usage of the funds has to be mentioned in the issue prospectus.

Types of Investors::

1. Issuer: A company that wants to issue shares in the stock exchange to raise capital.
2. Underwriter:  A banker, financial institution, or broker appointed by a company to help them underwrite the IPO.
3. DRHP: Draft Red Herring Prospectus, also known as the offer document is a document prepared by the Investment bankers for the IPO issuing company which contains the financial and operational information of the company along with a few other information like reason for raising money, etc.
4. Price Band: The price range is the price range between which the stock gets listed and decided by the company, where the lowest price in this range is referred to as floor price and the highest is referred to as cap price. So this is the range where interested buyers place their bids.
5. Issue Size: It means the number of shares issues multiplied by the amount of each share.
6. Under Subscription: A condition where the number of shares applied by the public is less than the shares issued by the company.
7. Oversubscription: A condition when a company receives more applications than anticipated, as compared to the number of shares being offered by the public.

Reasons to invest ::

Investing in an IPO can be appealing for several reasons:

1. Early Entry: Gives investors to gain early access to high-potential companies before they become widely recognized and benefit from their growth potential.

2. Value Appreciation: Potential for good value for money for investors as IPOs often experience an initial surge in share price.

3. Diversification: IPO helps to Enhance portfolio diversification by spreading investments across various sectors reducing risk and improving returns on their investment.

4. Access to Innovation: Invest in innovative firms and cutting-edge business models.

5. Liquidity: Offers a liquidity option for early investors and employees holding shares to sell their shares quickly and easily if they need to.

6. Transparency: Detailed disclosures and regulatory oversight provide transparency for informed decisions.

7. Supporting Growth: Your investment supports economic growth, job creation, and industry development.

Challenges and Considerations ::

Investing in Indian IPOs offers exciting opportunities, but it is also comes with some challenges too:

1. Market Volatility : IPOs shares can be highly volatile in the initial days of trading, with share prices subject to substantial fluctuations.

2. Limited Historical Data : Newly publicly listed companies may lack an extensive track record, making it challenging to assess their long-term performance.

3. Lock-In Periods : There are often lock-in periods for specified time, for early investors and company insiders. During these periods, selling shares may be restricted.

4. Market Conditions : The overall market conditions, both nationally and globally, can influence the success of an IPO. Economic factors can impact the performance of newly public companies.

Conclusion

In conclusion, investing in an IPO is an excellent wat to benefit from the growth of India’s economy and potential of new companies entering in the market frequently. With the right approach and mindset , investing in IPOs in India can be beneficial to any investment portfolio.