An initial public offering (IPO), a route for raising funds from the market, is the first sale of shares by a company to the public, institutional investors and HNIs.
After the initial share sale, the company is no longer privately held. It becomes a public listed company with shares that are traded on a stock exchange.
In August, 11 companies approached markets regulator Securities and Exchange Board of India (SEBI) with IPO proposals, and are estimated to raise more than Rs 7,000 crore.
So far in 2018, about 21 IPOs have raised a total of about Rs 28,000 crore.
What are the alternatives to an IPO?
A company can choose to remain private and raise funds from angel investors and venture capitalists.
Approaching private equity (PE) is also an option that companies frequently consider.
Why does a company file for an IPO?
There are several advantages of a company choosing to change its status from a privately-held to a public-listed company.
#To raise funds from a wider pool of investors
#Facilitate mergers & acquisitions
#Provide an exit for early investors
There are also a few cons of a company becoming a listed company.
The company will have to make their financial statements and accounts open to the public, and comply with market regulations.
The company will also have to bear more costs for accounting, marketing, and legal issues & services.
What makes a company eligible for an IPO?
For listing on the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE), a company has to have a minimum paid-up capital of Rs 10 crore. Also, the post-issue market capitalisation should not be less than Rs 25 crore.
Among other requirements, there has to be at least three years track record of either - applicant seeking listing; or the promoters/promoting company, according to the NSE website.
Terms associated with IPOs
Price Band and Fixed Price IPO: A price band is the range of the price at which the stock can be issued for the first time.
Some companies decide to fix the issue price for their initial share sale, making it a fixed price IPO.
Draft Red Herring Prospectus (DRHP): This is the document that gets circulated to the public after SEBI gives an IPO the green signal.
The document contains details of the initial share offer and crucial details about the company such as financial information and risks associated with the business.
Undersubscription and Oversubscription: An IPO is undersubscribed if the bids received are less than the number of shares offered. Oversubscription happens when the bids exceed the number of shares on offer.
Green Shoe Option: This is an option for over-allotment, included in the underwriting agreement. This allows the issuer to release additional shares in the event of oversubscription.
What is the process of filing for an IPO?
#Appoint a merchant banker
A merchant banker, or Book Running Lead Manager (BRLM) underwrites the company’s shares, buying all or some of the IPO shares and selling them to the public.
A merchant banker helps the company with the IPO process, assisting with the due diligence, DRHP and IPO roadshow.
The underwriters bear the risk of the transaction.
#File for the IPO and get SEBI nod
In India, companies have to file for an IPO with SEBI. The application needs to include the documents listed for the IPO Vetting Process, which includes the DRHP, details of the promoters and the company's annual reports.
The initial listing fees is Rs 50,000 and the subsequent annual listing fees will depend on the paid-up share capital of the company.
#Prepare the DRHP
#Market the IPO: This is typically done through advertisements to raise awareness about the company's offering. The process is also called the IPO roadshow.
#Fixing the price band and book building: Once the price band has been decided, the merchant banker or underwriter of the share offer decides the IPO price.
For three days, the company's shares are open to the public for subscription.
#Listing Day: The company begins trading on the stock exchange at a listed price, which is based on market demand for the issue.