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| IPO Basics |
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What is an IPO?
An Initial Public Offer or IPO is the first sale of a
company’s shares to investors on a public stock exchange. While IPOs are
effective at raising capital, being listed on a stock exchange imposes
regulatory compliance and reporting requirements.
When a shareholder sells shares it is called a “secondary
offering” and the shareholder, not the company who originally issued the
shares, retains the proceeds of the offering. To avoid confusion, it is
imporatnt to remember that only a company which issues shares can make a
“primary offering”. Secondary offerings occur on the “secondary market”, where
shareholders (not the issuing company) buy and sell shares to each other.
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Primary reasons for an IPO
The main reason for a Company to go for an IPO is to raise
capital, but there can be other considerations too. The various reasons for an
IPO are listed below.
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To raise additional capital for funding of projects/expansion plans.
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To dilute the shareholdings of the existing promoters.
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On listing, to bring the unlisted company into public view providing visibility
and an enhanced corporate image.
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Different Types of IPOs
There are two types of IPOs. These are listed below:
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Fixed Price Issue – In this case, the issue price is pre ascertained by the
issuer.
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Book Building – In this case, an indicative price range is declared by the
company for a public offer of its equity shares. Interested investors place
bids within this price range for the quantum of securities they want to
subscribe to. Prospective investors can revise their bids at anytime during the
bid period, that is, the quantity of shares or the bid price or any of the bid
options. Usually, the bid must be for a minimum of 500 equity shares and in
multiples of 100 equity shares thereafter. By recording the bids (quantum of
shares ordered and the respective prices offered) received in a “book”, the
issuer makes an assessment of the demand for the securities proposed to be
issued. After the bid closing date, the book runner and the company fix the
issue price and decide the allocation to each syndicate member. Thus, book
building method helps in optimum price discovery for the security.
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Book Building process versus normal IPO marketing process
The Book Building process allows for price and demand
discovery. Under fixed price issue, the demand cannot be anticipated by the
merchant banker and only after the issue is over, the response is known. In
book building, the demand for the share is known before the issue closes. The
issue may be deferred if the demand is less.
Also, the cost of the public issue is reduced and so is the
time taken to complete the entire process.
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