What is IPO

You may have often come across the word “IPO” while browsing the newspaper or scrolling through the net and might have pondered on its meaning. Well, through this article, we’ll guide you on the concept and the process in its entirety.

IPO Definition

So, what is IPO? Initial Public Offering or IPO is the process through which an unlisted company becomes a publicly traded company through the sale of shares to the public for the first time. IPO allows a company to raise equity capital from public investors. This process is often referred to as “going public” and enables the company to expand and grow faster.

How an Initial Public Offering (IPO) Works

Going public is entails formalities that are tough for a company to navigate alone. When a privately owned company plans on taking the IPO way, it needs to prepare itself not just in terms of public scrutiny but also in the form of paperwork and financial disclosures to meet the requirements of Securities and Exchange Board of India (SEBI). Once a company reaches a stage when it feels it can handle the SEBI regulations and provide the necessary facilities to public shareholders, it begins to advertise its interest in going public.

History of IPOs

The concept of IPO isn’t new. In fact, it has been popular amongst investors on Wall Street for decades. IPOs date back to 1602, when the largest commercial enterprise in the world back then, the Dutch East India Company, invited the general public to buy shares of the company. Through the years, IPOs have gone through many uptrends and downtrends in issuance and that can be attributed to innovation and economic factors. Of late, there has been a healthy rise in the upcoming IPOs. At this rate, it looks promising for the next few years too unless there’s a big financial crisis like 2008, which resulted in the least number of IPOs that year.

The IPO Process/Steps

There are a few predefined steps that need to be followed. Let’s check them in detail.

Preparation and Filing of Offer Document

  • A company that wants to raise capital from the public is required to prepare an offer document with information and disclosures that helps investors to make an informed decision. The offer document contains company details, the project, its promoters, financial details, objects of raising the money, issue terms etc.
  • The issuer company engages a merchant banker (SEBI registered) to prepare the offer document. The merchant banker helps in launching the IPO.
  • The draft offer document is filed with the SEBI and the company is required to make a public announcement about filing in English, Hindi, and in regional language newspapers. If the investors notice any incomplete/wrong/ lack of information in the offer document, they can send their representation/complaint to the merchant banker and or to SEBI.
  • SEBI reviews the draft offer document and may issue observations on the draft offer document with a view to ensure that sufficient disclosures are made by the issuer merchant/company bankers in the offer document to help the investor make an informed decision in the issue. One must know that SEBI doesn’t “vet” & “approve” the offer document. SEBI’s observations on the draft offer document are forwarded to the merchant banker who incorporates the necessary changes and files the final offer document with SEBI, ROC (Registrar of Companies) and stock exchanges and SEBI.

Opening of the Issue

  • Once the legal formalities are completed, the issuer company issues advertisements in English, Hindi, and regional language newspapers and the issue becomes open for public subscription.
  • In case the prospective investor is interested in subscribing to the shares of the issuer company on the basis of what is disclosed in the offer document, he can apply for its shares before the issue closes by filling up the application form and making the payment.
  • The entire back-office operation of the public issue, including processing of application forms, the despatch of refunds, and allotment of securities is handled by the RTI (Registrar to the Issue) on behalf of the issuer company.
  • Also note that only one application per PAN is allowed in any issue. If an investor makes more than one application, all the applications are liable to be rejected. The RTI matches the applicant’s name in the application form and verifies it with the PAN, Demat account details (DP ID and Demat A/c No ) and also sifts out the duplicate applications.
  • An IPO is usually open for three days during which retail investors may bid for stocks via their banks/brokerages online.
  • A Demat account is a must to participate in an IPO.

Pros and Cons of an IPO

PROS CONS
  • One of the biggest advantages of an IPO is the monetary aspect. The new capital generated by the IPO opens doors for many companies to utilize the money for finance research, capital expenditure etc.
  • The transactional procedures of an IPO are expensive. A significant amount is spent on completing the legal and associated formalities
  • Public image of the company improves. A publicly traded company is more visible and there’s a good chance that lenders would give more preference to publicly traded corporations than privately-owned companies.
  • Company’s proprietor may lose potential control over the company. The owners need to be careful as a lot of information about the company becomes public, and accessible to the competitors.
  • Why Does a Company Offer an IPO?

    • A company files an IPO to raise capital that can be used for clearing off debts, R&D, business expansion etc.
    • There are many reasons for a company to offer an IPO. One of the main reasons is its quest to expand and grab more eyeballs of the public. This way it can attract more customers and lead to possible mergers and acquisitions in the future.
    • As a company gets listed on the stock exchange, it adds credibility to the company.

    Should You Invest in an IPO and what are the things to remember while investing

    Investing in an IPO is a tricky proposition. Just because an IPO is garnering a lot of media attention doesn’t necessarily mean it’s an appropriate investment. Know the company thoroughly. Read the Red Herring Prospectus and scrutinize it. Gather information on the company’s business and the growth prospects in the sector it operates in, their plans with the funds generated through the IPO. There is no sure-shot success by investing in an IPO. Remember, you’d bear a direct impact on its success and loss on the listing day. Ideally, you should check the potential risks and rewards before investing in an IPO. In case you are a novice, you should read up and consult some financial expert/advisor rather than be misled.

    How to Apply for IPOs

    Let’s look at how to apply for IPOs:

    • Login either on the mobile application/website of the chosen broker and go to the ongoing IPO section.
    • Select the IPO you wish to apply for.
    • Enter the UPI Id
    • Submit application
    • Visit your UPI app & confirm the payment mandate sent by your broker
    • After successful authentication, the amount will be blocked in your bank account
    • If you receive the allotment, the blocked amount will be debited, and shares will be credited to your Demat & Trading account
    • If you do not receive the allotment, the blocked amount will be released to your bank account

    Conclusion

    If you want to invest in an IPO , don’t get swept up by the media-created hype surrounding the company. Ensure to do your own due diligence. Always refer to the issuing company’s preliminary prospectus, that is the “Red Herring Prospectus” before you wish to participate in an IPO.

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    Frequently Asked Questions

    When a company decides to go public from private ownership, the process is known as Initial Public Offering.

    There are quite a few reasons for a company to go public, mainly to raise capital, clear debts, business expansion, etc.

    If you are an investor and want to invest in an IPO, you need to have a PAN card and a Demat account.

    IPO investment gives you the opportunity to earn returns in 2 ways – 1. Listing gains and 2. Share value appreciation over the long-term. To invest in IPOs that can give good returns, do a thorough check of the company to understand the business of the company, its financial performance, and future business plans. Read the analyst ratings to gauge the sentiment around IPO. With your checklist intact before investing in IPO, you can expect to make a well-informed and favourable investment.

    The IPO is a multi-step process and the time taken depends on many factors. It might take six to nine months for the company to complete the IPO process and make a public debut.

    If you want to invest in a company’s IPO, you can keep a watch on the websites for exchanges like NSE and BSE or check the section of upcoming IPOs on our websites for the latest information.

    A company’s share price at the time of its IPO is decided by the valuation of the company, divided by the total number of shares at the time of listing.

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