1.6.

INITIAL PUBLIC OFFERING

Initial Public Offering (PO) can be defined as the process in which a private company
corporation can become public by selling a portion of its stake to the investors. Initial Public Offering
(PO) refers to the process where private companies sell their shares to the public to raise equity
capital from the public investors. The process of IPO transforms a privately-held company into a
public company. This process also creates an opportunity for smart investors to earn a handsome
return on their investments. Investing in IPOs can bea smart move for an informed investor. But not
every new IPO is a great opportunity. Benefits and risks go hand-in-hand. An IPO is generally
initiated to infuse the new equity capital to the firm, to facilitate easy trading of the existing assets, to
raise capital for the future or to monetize the investments made by existing stakeholders. The
institutional investors, high net worth individuals (HNIs) and the public can access the details of the
first sale of shares in the prospectus. The prospectus is a lengthy document that lists the details of the
proposed offerings. Once the PO is done, the shares of the firm are listed and can be traded freely in
 Introduction
1.7

the open market. A corporate may raise capital in the primary market by way of
offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of an initial public
public in the primary market. It is the largest source of funds with long or securities to the
company.
indefinite maturity for the
An IPO is an important step in the growth of a business. It
through the public capital market. An IPO also greatly increasesprovides
a company access to funds
the credibility and publicity that a
business receives. In many cases, an IPO is the only way to finance quick
terms of the economy, when a large number of IPOs are issued, it is a sign growth and expansion. In
of a healthy stock market
and economy. When the company makes its first IPO to the
between the company and investors, and the money flows to thepublic, the relationship is directly
Company
Shareholders thus become owners of the Company through their participation in the as its "Share Capital".
and have ownership rights over the company. This is the Company's IPO
which enables the company to create "Fixed Assets" which largest source of funds for a company,
will be employed in the course of the
business. The shareholders of the Company are free to exit their
market. investment through the secondary
Types of IPO
There are two Common types of IPO. They are:
1. Fixed Price Offering: Fixed Price IPO
can be referred to as the issue
companies set for the initial sale of their shares. The investors come to knowprice that some
about the price
of the stocks that the company decides to make public. The
demand for the stocks in the
market can be known once the issue is closed. If the investors
partake in this IPO, they must
ensure that they pay the full price of the shares when making the application.
2. Book Building Offering: In the case of book
building, the
a 20% price band on the stocks to the investors.Interested company initiating an IPO offers
investors bid on the shares before
the final price is decided. Here, the investors need to specify the number of
shares they
intend to buy and the amount they are willing to pay per share. The lowest
share
referred to as floor price and the highest stock price is known as cap price. The price
is
ultimate
decision regarding the price of the shares is determined by investors' bids.
Advantages of IPO
Investing in IPOs comes with both merits and demerits, Here are a few of the benefits and
drawbacks one must know before making investment decision.
Investing in an initial public offering withholds the below mentioned advantages:
1. Increased Recognition: When weighing the advantages and cons of an IPO, this good
factor comes out on top, It assists management in gaining more reputation and credibility
by becoming a trustworthy organization. Companies that are publicly traded are typicaly
more well-known than their private competitors. In addition, a successful process atracts
media attention in the financial sector.
2 Access to Capital: A corporation may never receive more capital than it raises byY go8
the substantial
altered byfinancial
Public. A company's growth trajectory might be substantiallyperiod of stability
cash available, An ambitious company may enter a new
1.8

new employees, establish facilities, pay

following its IPO. This decision can help R&D, hire
capital expenditures, and purchase new technologies, among other things.
off debt, finance
public, its shares are traded on
3. Diversification Opportunity: When a corporation becomes because no single investor
an exchange amongst investors. This
increases investor diversity
result, purchasing stock in a
OWns a majority of the company's outstanding stock. As a
publicly listed company can help diversify investment portfolios.
Discipline: Going public encourages managers to prioritize profitability over
4. Management expansion. It also makes contact with
shareholders
other objectives, such as growth or
easier because they can't hide their issues.
Perspective: When a company goes public, it gains an independent perspective
5. Third-Party strategy, and other factors that could hinder
it from
on its business model, marketing
becoming profitable.
Disadvantages of Investing in IPO
have to consider before starting to invest in an IPO:
There are a few factors arn investor would
IPOs can be quite costly. Aside from the continuous costs of regulatory
1. More Costs:
process necessitates the investment of
Compliance for public firms, .the IPO transaction
an advertiser toensure that everything
capital in an underwriter, an investment barnk, and
runs well.
board of directors, which reports directly
2. Lesser Autonomy: Public companies are led by a
to shareholders rather than the CEO or president. Even if the
board delegated authority to a
board retains the final say
management team tooversee day-to-day business operations, the
and the authority to fire CEOs, including those who founded the company.
under enormous
3. Extra Pressure: In the midst of market turmoil, publicly traded firms are
hazardous
pressure to keep their stock values high. Executives may be unable to make
decisions if the stock price suffers as a result. This occasionally foregoes long-term planning
in favour of immediate gratification.
Terms Associated with IPO
To have informed knowledge about IPO, it is necessary that one comes to know about some basic
terms used in the process.
Some of the commonly used terms are provided in the table below:
Terms Descriptions
Issuer An issuer can be the company or the firm that wants to issue shares in the
secondary market to finance its operations.
Underwriter An underwriter can be a banker, financial institution, mercharnt banker, or a broker.
It assists the company to underwrite their stocks.
The underwriters also commit that they will subscribe to the balance shares if the
stocks offered at IPO are not picked by the investors.
Fixed Price IPO Fixed Price IPO can be referred to as the issue price that some companies set for the
initial sale of their shares.
 1.9

Price Band
A prie band can be defined as a value-setting method where a seller offers an
upper and lower cost limit, the range within which the interested buyers can place
their bids.
Therange of the price band guides the buyers.
Draft Red Herring
The DRHP is the document that makes the public know about the company's IPO
Prospectus (DRHP) listings after the approval made by SEBI.
Under Subscription Under Subscription takes place when the number of securities applied for is less
than the number of shares made available to the public.
Oversubscription Oversubscription is when the number of shares offered to the public is less than the
number of shares applied for.
Green Shoe Option It refers to an over-allotment option. It is an underwriting agreement that permits
the underwriter to sell more shares than initially planned by the company. It
happens when the demand forashare is seen higher than expected.
Book Building Book building is the process by which an underwriter or a merchant banker tries to
determine the price at which the IPO will be offered.
A book is made by the underwriter, where he submits the bids made by the
institutional investors and fund managers for the number of shares and the price
they are willing to pay.
Flipping Flipping is the practice of reselling an IPOstock in the first few days to earn a quick
profit.

Eligibility criteria for investing in IPO

Any individual who is an adult and is capable of entering into a legal contract can serve the
eligibility norms toapply in the IPO of a comnpany. However, there are some other inevitable norms
an investor needs to meet.
The eligibility criteria are
1. It is required that the investor interested in buying ashare in an IPO has a PAN card issued
by the Income Tax department of the country.
2. One also needs to have a valid demat account.
3. It is not required to have a trading account, a Demat account serves the purpose. However,
in case an investor sells the stocks on listings, he will need a trading account.
It is often advised to open a trading account along with the Demat account when an investor S
looking forward to investing in an IPO for the first time.