What is an Initial Public Offering (IPO)?
According to SEBI norms when an unlisted company makes either a fresh issue of shares or convertible securities or offers its existing shares or convertible securities for sale or both for the first time to the public it is called an IPO. After the launch of the IPO a company's shares are traded in an open market.
Initial Public Offering is a corporate action in which private limited companies sell its shares to the public for the first time on a stock exchange. It is an opportunity for investors to be a part of a company's growth.
Through the process of IPO a private limited company sells its shares to the public in order to raise funds/capital. Individual and institutional investors can buy IPO of companies. Actually the companies sell ownership stakes to individuals and institutional investors.Individuals, Domestic Institutional Investors and Foreign Institutional Investors can bid for IPO.
Types of IPOs
A) Fixed Price Offering
B) Book Building Offering
Fixed Price Offering:-In fixed price offering method the company decides a fixed price per share, and this price remains permanent throughout IPO process.
Book Building Offering:- The book building offering method is a dynamic approach for determining share value. The main feature of book building offering is that the company decides a price range as floor price and cap price, within which investors can bid for the shares.
Stages of IPO
Preparation
When a private company decides to go public for raising capital/fund, it appoints investment bank as underwriters and extensive due diligence including financial audit and legal compliance is conducted.
DRHP
The company decides to go public for raising fund files a Draft Red Herring Prospectus before the Securities and Exchange Board of India (SEBI)
Stock Exchange
Clause regarding stock exchange is an important stage in IPO process. In this stage the company has to decide the stock exchange where the company would list its shares. Listing gives the companies the legal sanction to borrow capital from the public.
Promotion
The company promotes its IPO in accordance with norms of SEBI in this regard.
The company deciding the offering price based on investor demand and market conditions. After this Red Herring Prospectus is issued with the offer price range.Bidders may apply for shares within the specified price range.
Allotment
The shares are alloted to various investor categories such as qualified institutional buyers and non- institutional investors.