IPO are a type of public offering where companies offer their shares to the public for the first time. By doing this, they are able to raise capital to finance expansion, pay off debts, or for other purposes. Although IPOs can be a great way for companies to raise money, they also come with a certain amount of risk. In this article, we will explore what is IPO, what are the types of IPO & the terms which are normally used around IPO.
What is IPO?
An IPO is the first time that a company sells shares of itself to the public. This event usually happens when a company is young and needs money to grow. The company will sell shares to investors, who in turn will receive a stake in the company. IPOs can be a risky investment, as there is no guarantee that the company will be successful. However, if the company does well, investors can make a lot of money.
Types Of IPO
By now you might have got an idea on what is IPO? Now let’s understand what are the types of IPO in the following sections.
Fixed Price Offering
An initial public offering (IPO) is the process of bringing a company’s stock to market. It can be done through a number of different types of offerings, but the most common is the fixed price offering. In this type of IPO, the company and its investment bankers agree on a set price for the shares being offered. This price is usually set at a level that will ensure that the offering is fully subscribed, meaning that all of the shares will be sold. Once the IPO is priced, the company begins its roadshow, during which it meets with potential investors to generate interest in the offering.
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Book Building Offering
An initial public offering (IPO) is the first sale of shares by a company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately held companies looking to become publicly traded.
A book building offering is a type of IPO in which the price of the shares is not set in advance, but is determined by investor demand. The book building process begins with an indicative price range being set by the issuer. Interested investors then submit bids within this range, and the final price is determined at the close of bidding.
Book building offers have become increasingly popular in recent years, as they allow issuers to gauge investor interest and get a better sense of what price the market is willing to pay for their shares. This can help avoid situations where a company’s shares end up being undervalued or overvalued once they start trading on the open market.
Important Terms Associated With IPO
An issuer is a company that sells its securities to the public for the first time. The securities represent ownership in the company, and the IPO is the process of making these securities available for public investment.
The decision to go public is a major one for any company, as it has a significant impact on the business and its operations. Once a company goes public, it becomes subject to stricter financial reporting requirements and is under greater scrutiny from investors and regulators.
There are a number of reasons why a company might choose to go public, including raising capital to fund growth, increasing visibility and awareness of the business, and providing liquidity for shareholders. However, going public also comes with a number of risks and challenges, so it’s not a decision that should be made lightly.
If you’re considering an IPO for your business, it’s important to consult with experienced financial and legal advisors to ensure that you understand all of the implications of going public.
The term “underwriter” is used in a variety of ways in the financial world, but it generally refers to someone who takes on the risk of buying securities from a seller in order to sell them to investors. In the context of an initial public offering (IPO), the underwriter is the investment bank or banks that buy the shares being offered by the company going public from the issuing company. The underwriter then sells those shares to institutional and retail investors.
The IPO underwriting process is vital to ensure that a new company going public has enough demand for its shares to meet or exceed the supply. It’s also important to ensure that the price of the shares is set at a level that will generate enough interest from investors while also providing a fair return for the issuing company.
There are several types of underwriting arrangements that can be used in an IPO, but the most common is known as a firm commitment underwriting. In this type of arrangement, the investment bank or banks agree to buy all of the shares being offered by the issuing company and then resell them to investors. This type of arrangement provides certainty for both the issuer and the investors, but it also comes with more risk for the underwriters since they
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Draft Red Herring Process
The Initial Public Offering (IPO) process typically starts with the filing of a registration statement with the Securities and Exchange Board Of India (SEBI). This is also known as a “red herring” because it is filed with preliminary information about the offering.
The IPO process can be long and complicated, so it’s important to work with experienced professionals who can guide you through the process. After the red herring is filed, there is a period of roadshows and marketing to potential investors.
Pricing of the IPO is typically done close to the actual date of the offering. Once the IPO is priced, allocations are made to institutional investors and then the stock begins trading on the exchange.
After the IPO, there is a quiet period where insiders are restricted from selling their shares. This period typically lasts for six months.
Under Subscription and Over Subscription
One important part of the IPO process is determining the number of shares to be offered and the price per share. This is where terms like undersubscription and oversubscription come into play.
If there are more shares offered than there are buyers, that’s called oversubscription. In this case, the underwriters will try to get additional subscriptions from investors, but if they can’t, they may allocate shares on a pro-rata basis. That means that each investor who subscribed will get a proportionate number of shares based on their subscription.
If there are more buyers than there are shares offered, that’s under subscription. In this case, the underwriters will try to get additional shares from the company, but if they can’t, they may allocate shares on a first-come, first-served basis. That means that the first investors who subscribed will get all the shares they wanted, while later subscribers may not get any shares at all.
Green Shoe Option
A green shoe option is a provision that allows underwriters to sell additional shares if there is high demand for the stock.
Book building is the process by which an underwriter seeks to determine the price at which an initial public offering (IPO) will be offered. The book building process begins with the underwriter conducting market research to gauge investor demand for the shares. This is done through a series of meetings with potential investors, known as roadshows.
After the roadshows, the underwriter then sets a price range for the IPO based on feedback from investors. This price range is then used to determine the final offering price of the IPO shares.
Hopefully you have understood what is IPO & its types, few generally used terms in IPO, you can go through SEBI website linked below for more information on rules regarding IPO in India.
Read More: SEBI Rules on IPO