Demystifying IPO: Expert Insights with CA Rachana Ranade

Table of Contents

1. Introduction
2. What is an IPO?
3. Reasons for conducting an IPO
4. Types of IPOs
   1. Initial Public Offer
   2. Further Public Offer
5. The process of an IPO
6. How to check the subscription status of an IPO
7. Paying off debts with IPO funds
8. Promoters selling their stake
9. Lock-in period for IPO shares
10. Chennai category in IPOs
11. IPOs vs Shares: Advantages and disadvantages
12. Book building issue in IPOs
13. Other types of IPOs
    1. Fixed price issue
14. Conclusion

Introduction

In this article, we will dive into the world of Initial Public Offerings (IPOs). IPOs have gained a lot of popularity in recent times, with multiple companies going public to Raise additional funds. We will explore the meaning of IPOs, reasons why companies choose to conduct IPOs, different types of IPOs, the process involved in an IPO, and much more. By the end of this article, You will have a comprehensive understanding of IPOs and how they work.

What is an IPO?

An IPO, short for Initial Public Offering, occurs when a company offers shares to the public for the first time. This allows the company to raise additional funds by selling a portion of its ownership to investors. The purpose of an IPO can vary, from expanding the business to repaying debts or boosting working capital. The shares are offered to a wide range of investors, including individuals, banks, and financial institutions.

Reasons for conducting an IPO

There are several reasons why a company may choose to conduct an IPO. One common reason is to raise capital for expansion, allowing the company to invest in new projects, acquisitions, or research and development. Another reason is to raise funds for working capital, ensuring smooth day-to-day operations of the business. Additionally, if a company has accumulated significant debts, they may opt for an IPO to repay these loans and reduce financial burdens.

Types of IPOs

There are two main types of IPOs: Initial Public Offer (IPO) and Further Public Offer (FPO).

Initial Public Offer (IPO)

An IPO occurs when a company offers its shares to the public for the first time. It gives individuals like you and me an opportunity to invest in the company's shares. The IPO can be a lucrative investment if the company's stock price performs well after being listed on the stock exchange.

Further Public Offer (FPO)

A Further Public Offer, also known as a Follow-up Public Offer, happens when a company that has already gone public wants to raise additional funds. Unlike an IPO, where the company offers shares for the first time, an FPO involves offering additional shares to the public. This allows existing shareholders to sell their shares while new investors can buy into the company.

The process of an IPO

The process of an IPO involves several steps, which are as follows:

1. Selection of investment bankers: The company selects investment bankers, also known as underwriters, to manage the IPO process. These underwriters help the company determine the offering price, quantity of shares to be offered, and overall market strategy.

2. Due diligence: The company and the underwriters conduct extensive due diligence to Gather all necessary financial information, legal documents, and market data. This helps ensure transparency and accuracy in the IPO process.

3. Roadshow and prospectus: The company organizes a roadshow where they present their business plans, financials, and growth prospects to potential investors. A prospectus is also prepared, which contains detailed information about the company, its objectives, and the associated risks.

4. Pricing and allocation: The underwriters work with the company to determine the offering price range for the shares. This price range is communicated to potential investors, and they submit their bids. Once the bidding period ends, the underwriters allocate the shares Based on demand and finalize the offer price.

5. Listing on the stock exchange: After the shares are allocated, the company's shares are listed on the stock exchange. This allows trading to commence, and investors can buy and sell shares of the company.

How to check the subscription status of an IPO

To check the subscription status of an IPO, you can visit websites like Chittorgarh.com. These websites provide information on the number of times an IPO is subscribed on different days of its offering period. The subscription status is usually updated daily and allows you to gauge the investor demand for the IPO.

Paying off debts with IPO funds

It is common for companies to utilize the funds raised through an IPO to repay existing debts. This strategy can help reduce the company's interest burden and improve its financial position. However, it is essential to evaluate the company's overall financial health, including its ability to generate profits and repay debts, before considering an IPO investment.

Promoters selling their stake

It is not uncommon for promoters to sell a portion of their stake in the company during an IPO. Promoters may choose to do this for various reasons, such as complying with regulatory norms or unlocking the value of their shareholding. The sale of promoters' stakes does not necessarily indicate a risk factor for investors but rather a strategic decision made by the company's management.

Lock-in period for IPO shares

Usually, there is no lock-in period for IPO shares. Once the shares are allotted, investors have the freedom to sell them in the secondary market if they wish. However, in some cases, there may be a lock-in period for anchor investors. These investors are required to hold their shares for a specific period, as mandated by regulatory guidelines.

Chennai category in IPOs

The Chennai category, also known as the High Net Worth Individual (HNI) category, is intended for investors who want to invest more than 2 lakh rupees in a specific IPO. This category includes individuals with high net worth, such as celebrities, prominent businessmen, and high-income individuals. However, investing in the HNI category does not necessarily increase the probability of getting an IPO, as it is equally competitive due to the high demand for shares.

IPOs vs Shares: Advantages and disadvantages

Investing in IPOs and shares both have their advantages and disadvantages.

Advantages of IPOs:

• Opportunity to invest in a company's shares at an early stage
• Potential for significant returns if the IPO performs well
• Possibility of getting shares at a lower price compared to the secondary market

Disadvantages of IPOs:

• Uncertainty of the IPO's performance in the market
• Limited historical data and financial information available for analysis
• Potential for overvaluation of shares in the IPO due to market hype

Advantages of shares in the secondary market:

• Availability of historical data and financial information for analysis
• Greater liquidity and ease of trading
• Opportunity to diversify investments across multiple companies

Disadvantages of shares in the secondary market:

• Possibility of paying a higher price due to the market's evaluation of the company
• Potential for low or negative returns if the share price declines

Book building issue in IPOs

Book building is a process utilized in IPOs to determine the price at which shares will be offered to the public. It involves market participants, including institutional investors, submitting bids within a specified price range. The price at which the maximum number of shares are bid becomes the final offer price. This allows the market to determine the fair value of the shares.

Other types of IPOs

Apart from book building issue, there is another Type of IPO called a fixed price issue. In a fixed price issue, the company offers shares at a specific price without a price range. The investors have no choice in determining the offer price and must buy the shares at the predetermined price.

Conclusion

Overall, IPOs provide investors with an opportunity to participate in the growth potential of a company at an early stage. However, thorough research and analysis are essential before investing in an IPO. Understanding the process, evaluating the company's financials, and considering market conditions can help make informed investment decisions. Remember that investing in IPOs or shares carries certain risks, and it is advisable to consult with a financial advisor before making any investment decisions.

Highlights

• IPOs (Initial Public Offerings) allow companies to raise additional funds by offering shares to the public for the first time.
• Companies conduct IPOs for various reasons, including business expansion, working capital requirements, and debt repayment.
• There are two main types of IPOs: Initial Public Offer and Further Public Offer.
• The IPO process involves selecting investment bankers, due diligence, roadshows, pricing, and listing on the stock exchange.
• The subscription status of an IPO can be checked on websites like Chittorgarh.com.
• Companies may use IPO funds to pay off debts, which can improve their profitability.
• Promoters selling their stake in an IPO is a common practice and not necessarily a risk factor for investors.
• IPO shares usually do not have a lock-in period, allowing investors to sell them in the secondary market.
• The Chennai category in IPOs is for high net worth individuals who want to invest more than 2 lakh rupees.
• IPOs offer advantages like investing at an early stage and potential for significant returns, but also come with risks.
• Other types of IPOs include book building issue and fixed price issue.

FAQs

Q: Can anyone Apply for an IPO?

A: Yes, anyone can apply for an IPO, provided they meet the eligibility criteria specified by the company and the regulatory authorities.

Q: What is the difference between an IPO and a further public offer (FPO)?

A: An IPO is the first time a company offers its shares to the public, while an FPO occurs when a company that has already gone public offers additional shares to the public.

Q: What is the AdVantage of investing in IPOs?

A: Investing in IPOs provides an opportunity to buy shares at an early stage and potentially benefit from significant returns if the IPO performs well in the market.

Q: Are IPOs always profitable?

A: No, IPOs can be risky investments, and not all IPOs generate profits for investors. It is crucial to thoroughly research the company and evaluate its growth prospects before investing.

Q: Can I sell the IPO shares on the listing day?

A: Generally, there is no lock-in period for IPO shares, allowing investors to sell them on the listing day if they choose to do so. However, there may be exceptions for anchor investors, who may have a lock-in period.

Q: How can I determine the fair value of IPO shares?

A: The fair value of IPO shares can be determined through various valuation methods, such as analyzing the company's financials, comparing it to industry peers, and considering market conditions.

Q: Is it necessary to use a stockbroker to apply for an IPO?

A: Yes, you need to have a demat account and a stockbroker to apply for an IPO. The stockbroker will facilitate the application process and ensure the shares are credited to your demat account if your application is successful.