Distinctive
trait of a Bull market is issuance of IPOs by several companies. When
markets are upbeat companies line up with their initial public
offerings. Here’s everything that an investor needs to know about an
IPO.
So, what is an IPO?
When shares of a particular company are offered to the public at large for very first time it is called Initial Public Offering. It is the very first time when shares of a particular company are getting listed on the stock exchanges.
IPO market is called as “Primary
Market” and market where buying & selling in these shares happen
after they get listed is called “Secondary Market.”
Firstly, why does a company come out with an IPO?
- To raise money from investors.
- They use this money usually to fund their future expansion or sometimes to pay off their old borrowings.
- Apart from this, getting listed brings a lot of prestige to the company because not all companies are capable of coming out with an IPO and getting listed on the stock exchange.
- In addition to this, it helps existing shareholders to identify true value of their shares that they are holding. Because now true value of the shares will be decided by millions of investors who will be trading in this stock once it gets listed.
Why do investors invest in IPO?
Investors who invest in an IPO
believe that the price at which they are offered the shares now in the
IPO is much less than the price that will prevail once the shares
get listed on the Stock Exchange i.e they are looking for an
opportunity to make listing gains.
The IPO process & the “Red Herring Prospectus”.
- On deciding to come out with an IPO, the issuing company first appoints “Book Running Lead Managers.” They help the company – in getting approval from SEBI, promoting and Marketing the IPO and finally getting shares listed.
Once book running lead managers are appointed, they along with the
company file the draft offer document with SEBI for its approval
Draft offer document basically contains information about the
company, about the promoters, the shareholders, the business of the
company, the financials of the company, information about the risk
involved in investing in the IPO etc. So, it has all the information
that an investor is looking for before deciding whether to invest in the
IPO.
If SEBI is satisfied with the draft offer document then it will give
its approval, otherwise it will ask the issuer company to revise its
draft offer document and company will have to revise and reapply for
approval with SEBI. Once draft offer document gets approval of SEBI, it
is then called as “Offer Document” . Offer document is then sent to
registrars and stock exchanges.
Registrars are the agencies that do the back office work for the IPO,
like collecting the forms, collecting the bids from the investors,
allocating the shares etc.
Once the Offer document gets cleared by the exchange, the company
adds “Issue size & Price per share” in the offer document. The offer
document now becomes a “ Red herring prospectus” and is available to
the public which they can go through before investing. As mentioned
earlier it contains all the information that an investor looks for to
decide whether to invest in the IPO.
The main difference between the offer document and the red herring
prospectus is that the red herring prospectus consists of the issue size
and the price of the IPO which is absent in case of offer document.
Issue size is basically the amount of money that company is planning to raise from the market through the IPO.
Based on the pricing there are 2 types of IPO:
- Fixed price IPO: Where the offer price is “fixed”, and known to the investor before applying.
- Book Built Issue: Here a fixed price is not given rather instead of giving you a fixed price they give you a price range. The logic being that these shares have never been traded earlier so the company does not know the exact price at which investors will be willing to buy the shares. The investors then have to place their bids within this price range and based on the bids received final offer price is determined.
It is important to note that retail
investors (i.e investors applying for less than Rs 2,00,000) have an
option to apply at “Cut Off Price”. If they select “Cut Off” option
price in their application form, it means that whatever is the final
price arrived by book built option, they are willing to buy the shares
at that price.
Out of the total shares on offer in
book built issue, around 50% is reserved for QIBs (Qualified
Institutional Bidders) like Banks, Foreign Institutional Investors,
Mutual Funds etc who are registered with SEBI and who apply in large
quantities.
Within the QIB category there are
some investors called the “anchor Investors” . These are qualified
institutional investors who apply for shares of value of Rs 10Cr or more
and who are allowed to invest in the IPO before the IPO hits the
market.
Why are anchor investors allowed to
invest in the IPO before it hits the market? – because they build
confidence to retail investors who are planning to invest in the IPO.
Because when investors see that anchor investors have invested heavily
in the IPO it gives them confidence to apply in the IPO.
Apart from this around 35% is
reserved for retail investors i.e investors who apply for Rs 2,00,000 or
less and balance 15% is reserved for other non-institutional bidders
which includes NRIs, companies, trusts, High Net Worth individuals etc.
who apply for more than Rs 2,00,000 of shares.
Meaning & Implication of IPO getting oversubscribed:
Over subscription means that the demand for shares in the IPO is much more than the number of shares that are on offer.
This implies that now the company
cannot issue to you all the shares that you have applied. In fact there
are chances that you might not get a single share if the issue is
oversubscribed heavily because company allots shares based on lottery
system in case of over subscription.
To ensure you get at least some
shares it is important to understand that as only 15% is reserved for
individuals in non-retail category where as 35% is reserved in retail
category, there are chances of higher allocation of shares in retail
category if the issue is heavily oversubscribed. So, it makes sense that
you apply in retail category if the issue is very popular and chances
of over subscription are very high
Also if the issue is very popular and
is expected to be heavily oversubscribed, its best to apply for the
minimum lot because even if you apply for more lots then there is little
chance that you will get more than 1 lot and your money will be blocked
unnecessarily
Also it helps to apply in IPO through
ASBA as application money shall be debited from the bank account only
if your application is selected for allotment after the basis of
allotment is finalized
So what is ASBA?
ASBA means “Application Supported by Blocked Amount”
Here the amount for which you have
made the application gets blocked in your account first but only that
amount of money gets deducted from your account that corresponds to the
shares that are allotted to you. So the advantage is that you continue
to receive interest on your application money till the time it is
blocked and you don’t have to bother about the refunds if shares are not
allotted to you or only few shares out of the total applied are
allotted to you.
Few timelines:
- A Book built issue, is usually open for subscription for 3 – 7 working days
- It takes around 6 to 7 working days post subscription for the stock to get listed on the exchange.
- SEBI however is trying to reduce this time further so that the investors are not exposed to market volatility because when you apply for the IPO the market scenario may be good but the time it gets listed, suddenly there may some news which may affect the overall market and thereby affect the listing price of these stock. Therefore, to reduce the exposure to market volatility the time form when you subscribe to the time shares get listed, must be reduced as much as possible.
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