"what is initial public offering

An IPO is like a negotiated transaction where the seller chooses when to come public and it’s unlikely to be a time that’s favorable to you…

But, before entering into the pool of ipo (Initial Public Offering process), let’s stroll through the historic value of the term.

What is an ipo & its History -

From decades, the term has been a buzzword on the wall street of market. The Dutch conducted the first modern IPO by offering shares to the Dutch East India Company to the general public. Since then, this tradition of IPO issuance has been in demand by almost every private company; in order to raise capital from public investors through the issuance of public share ownership.

What is IPO in share market or IPO in stock market?

Initial Public Offering (IPO), also called as stock market launch is a sort of public offering under which, shares of a company are sold to institutional investors and usually the retail investors. This process involves the sharing  of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors.

In simple terms, IPO in share market is the process wherein a private company can go public by selling its stocks to the general public. The company sharing its stocks known as an ‘issuer’, does this with the help of investment banks. Once the IPO is issued to a private company, then the company’s shares are traded in an open market.

Key benefits of IPO.

• You will get an ability to raise capital quickly by reaching a large number of investors
• Gained cash can be used to expand the Business
• An IPO can be seen as an exit strategy for the company’s founders and early investors, realizing the full profit from their private investment.
• Lesser known companies may have a chance to gain a wider amount of publicity from primary market
• You will get the prestige of getting listed on a major stock exchange
• It will help companies to attract new talent by offering perks like stock options

Now, Have a look that HOW AN IPO WORKS?

Before the issuance of an IPO, a company is considered to be Private

When a company reaches a stage in its growth process where it believes it is mature enough for the rigors of SEC regulations along with the benefits and responsibilities to public shareholders, it will begin to advertise its interest in going public.

This stage of company is also known as the ‘Unicorn stage’ with valuation of approximate $1 billion. Then, IPO comes into existence.

An IPO is a big step for a company to provide access to the public for raising a lot of money.

IPO shares of a company are priced through underwriting due diligence. Generally, the transition from private to public is a key time for private investors to cash in and earn the returns they were expecting.

Meanwhile, the public market opens up a huge opportunity for millions of investors to buy shares in the company and contribute capital to a company’s shareholders' equity. The public consists of any individual or institutional investor who is interested in investing in the company.

Therefore, the total number of shares the company sells and the price of selling shares are the generating factors for the company’s new shareholders equity value. And with an IPO, the shareholder’s equity increases significantly with cash from the primary issuance.

IPO PROCESS & UNDERWRITERS

(How to apply for IPO?)

Before proceeding with the process, you need to be aware about the UNDERWRITERS- An underwriter is any party that evaluates and assumes another party's risk for a fee. Underwriters play a critical in many industries in the financial world, including the mortgage industry, insurance industry, equity markets, and some common types of debt security trading.

Comprehensively, an IPO process consists of two parts.

Pre-marketing is the first phase of the offering, while the Initial Public Offering is the second itself. If your company is interested in an IPO, then you have to advertise it to underwriters first by soliciting private bids or it can also lead to make a public statement to generate interest.

The Underwriters lead the IPO process, who are chosen by the company. A company can chose one or many underwriters to complete the IPO process collectively. The underwriter in IPO registration process plays a quite significant role be it document preparation, filing, marketing, and issuance.

WHAT IS PRICE BAND IN IPO?

In Red herring prospectus, issuer may mention a price on which price cap is determined. The cap on the price band shall be less than equal to 120% of floor price.

What is book building process in ipo?

Normally in ipo, company determines a fixed price but in book built process, price is as per the demand. Company specifies a price band like share price is 20 to 24. Bids are placed by the investors and company selects the price band on which maximum number of bids are placed. This is called book building process.

What is cut off price in ipo?

In a book building process, a specific price is determined as per the demand. Which will be the issue price of ipo and that issue price is called cut off price in ipo.

What is ipo grading?

Ipo grading is the grade assigned by credit rating agency (CRAs) registered with SEBI. The grade represent a relative assessment of the  fundamentals of that issue in relation to the other listed equity securities india. Such grading is assigned on a 5 grade scale, ipo grade-1 & 2 are poor funamentals and ipo 3 is average, 4 is above average and ipo grade 5 is strong fundamentals. Ipo grade can be seen in red herring fundamentals.

What is conditions for making an ipo?

A company may make an ipo if

• It has Net tangible assets at least 3 crores. In which atlest 50% are invested in monetary assets.
• Minimum average pre tax operating profit of rs. 15 crore
• Net worth of rs. atlest 1 crore.
• If it has changed it name, 50% revenue for the last year must be come from new name
• Shall not make an allotment if the allottee are less than 100.

What is fast track issues?

Well established and listed company complying with specifying conditions may make a ipo via Fast track process. Such company are not required to file Draft offer document for SEBI comments and to stock exchange. Above conditions are-

• Equity shares are listed for more than 3 year
• Average market capitalization of public shareholding is atlest 100 cr.
• The issuer redressed atleast 95% of the complaints received from the investors.
• Compliance with the equity listing agreement for atleast 3 years.
• Impact of auditors qualification in respect of financial does not exceed 5 percent of net profit.
• Entire shareholding shall be  held in dematerialized form.

 

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What is ipo reservation to fii, rii, employess & public.

If ipo is issuing through book building process-

Catagory	Maximum reservation
Employess excluding promoters	5% of the post issue capital
Shareholders Listed promoting companiesListed group companies	10% of the issue size
Business association as depositers or bondholders	5% of the issue size

Allocation of net offer to public-

Catagory	Allocation %
Retail individual investors (RII)	Not less than 35%
Non institutional investors	Not less than 15%
Qualified institutional buyers	Not more than 50% to QIB.

How to Apply for IPO Online/Underwriters

You can choose any of the investment bank accounts online or DEMAT account to apply for an IPO. Some of the alternatives are as follows:

• Apply for IPO online at Zerodhasss
• IPO by ASBA with HDFC Bank
• Apply IPO online on Sharekhan
• Get IPO online by ICICI Bank

To IPO or not?

The Registration Process of Initial Public Offering (IPO) can be complex & time-consuming sometimes. Any company contemplating whether to move forward with an IPO needs to evaluate the benefits and drawbacks involved. 

If you feel like you are ready to move for IPO…Head over with TAX ADVISORY for a hassle-free, authentic & affordable procedure. Get the entire relevant consultation in one Go!!

Also, for other types of Registration like FSSAI, GST, Company Registration, Capital Gain, etc. TAX ADVISORY is helping you all over your Legal services!

It’s never too late to start securing your financial future…

BY MEGHA SAXENA

CONTENT PRODUCTION & SOCIAL MEDIA MANAGER

TAX ADVISORY

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