All that you want to know about IPOs

S Ramesh of Kotak Investment Banking and Prithvi Haldia of Prime Database explain.

Here is a verbatim transcript of the exclusive interview on CNBC-TV18. Also see the accompanying video.

Q: What is an IPO?

S Ramesh: An IPO if you were to take its full form is Initial Public Offering. It is the first public offering made by a limited company to list its shares on the stock exchange and that’s when once the shares get listed on the stock exchange the value of company shares become public become available for trading to all the members of the Indian public.

Q: Just to expand on that why does a company need to go for an IPO?

Haldia: So I would have just added that an IPO basically would be made by a company primarily in case it requires funds. So for companies in a growth stage it is looking at expansion diversification. It does not have internal resources or internal generation, it’s already debt leveraged, and it wants to expand on equity. So the primary objective for an IPO is to raise capital. But then there are also IPOs where there is an offer for sale, where an existing promoter is trying to exit part of his holding through an IPO, the company is not listed and he is trying to get listing by not adding shares to the company’s capital structure, but by diluting some of the shareholding.

This could also be true for PSU divestment where the government of India which is the dominant shareholder does an IPO and dilutes a part of its holding 5-10% in favour of the retail investors. The objective behind this kind of an offer for sale could also be not only to raise money for example in the case of government for divestments but in the case of private promoter to seek valuations and convert the shares into a currency because unless the company is listed the valuations is still in the minds of a limited number of people.