Aug 08, 2014,11.52 IST

All you want to know about IPO

1. What is an IPO?

When a company wishes to raise capital or expand its operations, it comes out with an initial public offering (IPO). It is a primary issue because subscribers buy it directly from a company. The company then keeps the offer open for a certain time period and at a certain price. 

2. Things to know before investing in IPO

a) Check on the promoters and the company
Before investing in an IPO, you should check the professional background of the promoters and the company. This is because in the past certain companies or people have raised money from primary market and have cheated the investor. Such companies are known as ‘fly-by-night’ companies. You must also read the offer document to ensure the credibility of the promoters.

b) Why the IPO
It is important to know why and for what the company is raising money through IPO, as money could be raised for several purposes such as for project expansion, mergers and acquisitions, or repayment of debt. You should understand whether the company will be able to enhance its value after raising money. This can give you a good idea if investment in that particular company is worthwhile.

c) Application form
Application forms are available with brokers, banks, depository participants. You need to fill all the information asked in the form correctly or else it is liable to get rejected and you also need to have a demat account.

d) Promoters stake
Promoters of the company are the key individuals in the market so it becomes necessary to know whether promoters are buying or selling their shares. A higher promoter’s stake in company indicates that promoter has confidence in his business and is sure of further growth. This can help to figure out where the company is moving.

e) Share price
Sometimes, companies issue shares at expensive valuations. Valuation of shares is an on-going process and understanding fair value of the company’s share becomes very important. Companies operating in different industries are valued by different methods. Thus to value price correctly you need to understand the method which best suits the business. However, if the issue price exceeds the fair value then you should avoid the issue.

f) Sales/Turnover
A consistent growth in the company is a good sign. You should compare the growth of company with its peers and see if the company is lagging behind.  An outperforming company means increasing market share and a good sign to invest in.

g) Listing the shares
The shares must get listed on the stock exchange within seven working days from the date of allotment. Investors are allowed to sell the shares post listing.

3. What is an IPO rating?

Rating agencies and financial experts such as consultants and brokers usually rate the IPOs and take a decision on behalf of the investors. IPO grading is still optional. SEBI is currently working to make it mandatory as it will help investors for decision on investing.

4. How is the allotment done?

The allotment process depends on the response to the issue. The basis of allotment is finalized by the BRLMs (Book Running Lead Managers) within two weeks from the date of closure of the issue. The bidders who bid at the lower price than the issue price are not eligible for allotment, so only those who apply at or above the issue price have chances of getting allotment. The basis of allotment is publicly declared and you can check your allotment status and once it is allotted you should check your demat account.

5. What about the ones who don’t get any allotment?

The ones who don’t get any allotment will get the full refund and others get refund as per their individual allotment status. In the latter case, if you applied for 200 shares but you were allotted only 50 shares, then the remaining amount for 150 shares that were not allotted will be refunded in your account. The refund amount can be cross checked by subtracting the value of shares allotted from the amount paid on application.

6. What is book building? 

A book building is a price discovery mechanism under which the issuers do not fix the issue price of securities before the issue. Here, they provide a  price range for pricing the issue. The lowest price of the range is called the floor price and the highest price is called as cap price.

Investors subscribing to the issue put their bids within the range given by the issuer and the final price is decided based on the demand-supply for the respective security. Cut off price is the price decided by the issuer at which the shares are allotted to the investors. 

7. What is FPO? 

When a listed company makes an offer for sale to public shareholders after its initial public offer, it is called a FPO or a Follow-on Public Offer. A company could either issue fresh equity shares or any major shareholders including promoters may divest their stake. Just like an IPO, the price discovery in a FPO is done via book building mechanism or any other pricing mechanism. 

8. What is DRHP? 

DRHP or Draft Red Herring Prospectus is a draft offer document submitted to SEBI by a company making adequate disclosures as per compliance rules. A company planning to raise funds via issue of securities to public has to file a DRHP with SEBI before filing a prospectus with Registrar of Companies.

DRHP includes details about the company’s business, its promoters, the projects, financial statements, objective of raising the money, how the company will use proceeds from the offering, terms of the issue, risks involved with investing, etc.

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