Initial Public Offering (IPO) refers to the process of offering shares of a private corporation to the public corporation in a new stock issuance. This allows a company to raise capital from the public investor. The transition from a private limited to a public limited company is a crucial time for private investors to scrutinize the gains from their investment as it typically includes share premiums for current private investors. It allows the public to participate by growth by investing in upcoming IPOs or current IPOs.
Types of IPOs in the share market
The Initial Price Offer can be made through fixed price issues, book building issues or combinations of both types.
Fixed Price Issue
In the fixed price IPO process, the company along with their underwriters evaluate the company’s assets, liabilities, and every financial aspect. With the data, they collect they fix a price of the per issue to achieve the fund they are seeking to raise from public funding. The price fixed per issue is printed in an orderly document. The orderly document must justify the price of the qualitative and quantitative factors. The demand for the securities, however, is known only after the issue is closed. The oversubscription levels too are high in the fixed price offerings as sometimes it can be in millions.
Book Building Issue
This is a fairly new concept in India, as in price is discovered during the process of IPO. There is no fixed price, but there is a certain price band. The lowest prices in the band are referred to as floor price and the highest is referred to as cap price.
The price band is printed in order document and the investors can bid for the desired quantity of shares with the price which they would like to pay. On the basis of the bid, the share price is decided. The securities offered above or equal to the floor price.
Why do companies issue an IPO?
Fresh Capital Needs: One of the major reasons for any company to issue an IPO is to raise fresh capital. Most of the companies can seek fresh capital from any bank or borrow bonds in the market. But this process requires them to pay regular interest and also repayment of principal. This makes IPO fairly easy and convenient process to seek funding. With IPO companies can raise money by sharing the ownership of the company.
Anchor Investments: IPOs are used to give an exit to early investors. Usually, when a large institute invests in a company at an early stage the agreement includes to give them an exit in a particular time period, say like 5 to 7 years. In such cases, the company may plan an offer-for-sale where the particular PE fund or venture fund to give the early investors an exit through any OFS. This exit can either be partial or total.
Facilitates Listing: By issuing a new IPO a company can list its shares on the stock market and in secondary markets. This gives greater visibility to the company and the stock. This serves as a scale to measure the value of stock and that of the company. Not only does the shareholding of promoters become valuable but the stock and the company can enjoy wider publicity and visibility in real competition.
Important things to know about IPOs in India
While IPOs are a wide subject, the following three points are highly necessary to understand the typical topic of IPO issuance when it comes to the Indian market.
Fixed Price Vs Book Building
These are the two types of IPOs in India. The method is based on the idea to discover the right price of the share. The company starts off with an indictive price, and then the price is discovered through the forces of demand and supply. Book building is a lot more famous and there are hardly any fixed price issues these days.
Offline Vs Online bidding in IPOs
Investors who are looking to invest in IPOs can either invest through online or offline bidding methods. The online process is simpler and can be done through an existing trading account with your broker. Your Demat Account needs to be mapped to an online DP account and an online bank account.
Benefits of ASBA
Nowadays IPOs come with the benefit of ASBA facility which is Application Supported by Blocked Amounts. It is a method by which investors can block the funds and allow IPO allotment of money that is getting debited to your bank account.