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What is IPOs?
An Initial Public Offering (IPO) is the process through which a private corporation offers its stock to the public for the first time. This allows the company to raise capital by selling equity shares to investors.
Let’s explore the steps involved in the IPO process in India and understand why companies choose to go public.
Step 1: Investment Bank Selection
The company selects an underwriter investment bank that assists in determining the fundraising amount, type of securities, and initial share price. Larger stocks may involve multiple investment banks.
Step 2: Red Herring Prospectus (RHP)
The RHP is a comprehensive document prepared by the underwriters, containing information about the company’s financials, plans, offerings, investors, risks, etc. It is submitted to the Securities and Exchange Board of India (SEBI) for approval.
Step 3: SEBI Approval
The RHP is reviewed by SEBI, and if satisfied, the company receives approval to proceed with the IPO. If changes are required, the underwriters and the company make the necessary revisions and resubmit the proposal.
Step 4: Stock Exchange Approval
Approval from the stock exchange, such as BSE or NSE, is obtained to list the IPO. The exchange has specific criteria for approval, which need to be met by the company.
Step 5: Subscription of Shares
The company opens its stocks to investors during the designated subscription period. Interested investors fill out the IPO application form to subscribe to the offerings.
Step 6: Listing
Investors place their bids within the specified price band. After the IPO closes, the shares are allotted to successful investors and credited to their demat accounts. The stock is then listed on the stock exchange.
Capital Requirement for Growth and Expansion:
Companies opt for an IPO to raise funds for expanding their operations, increasing productivity, or funding new projects.
Exit Strategy for Early Investors and Owners:
Going public provides an exit opportunity for existing owners, venture capitalists, and stakeholders, allowing them to sell their stakes and gain liquidity.
Creating Public Awareness:
An IPO generates publicity and awareness about the company’s operations. It attracts attention from potential customers, partners, and stakeholders.
An IPO is a significant milestone for a company, enabling it to raise capital, provide liquidity to early investors, and gain public visibility. By understanding the IPO process and the motivations behind going public, investors can make informed decisions while trading IPOs.
Investing in an IPO offers the opportunity to buy company shares at the early stages of its public listing. If the company performs well in the future, the value of its shares may increase, potentially leading to capital appreciation for investors.
To participate in an IPO in India, you must have a demat account and a trading account with a registered stockbroker. You can place a bid for shares through your broker using the online IPO application process provided by the stock exchanges or through the ASBA (Applications Supported by Blocked Amount) facility of banks.
In India, IPO shares are allocated proportionately, such as the proportion of shares applied to the total available shares. However, some IPOs may have specific allocation criteria, such as reserved quotas for retail investors, employees, or other categories as specified in the IPO prospectus.
Investing in IPOs involves certain risks, such as market volatility, the company’s performance, industry-specific risks, and the possibility of the shares trading below the IPO price. It’s important to carefully evaluate the company’s prospects, financials, and industry conditions before making investment decisions.
The grey market for IPOs is an unofficial market where shares of an IPO are traded before the official listing on the stock exchange. Investors and traders in the grey market speculate on the potential listing price and share demand.
Yes, once the IPO shares are listed on the stock exchange, you can sell them in the secondary market if buyer demand exists. However, it’s important to consider market conditions and liquidity and consult your broker for guidance on the optimal time to sell.
