Unquestionably , the IPOs of Zomato and Nykaa piqued your interest in learning more about IPOs. There was a time when Zomato IPO memes were all over Twitter.
An IPO is a company that wishes to go public by issuing stocks on the primary market (Initial Public Offering). It could be an old or new business.
Issuers are companies that sell shares to the public. In the secondary market, new shares can be traded. This means that someone who buys shares in an initial public offering (IPO) can sell them on the secondary market. National Stock Exchange (NSE) or Bombay Stock Exchange are examples of secondary markets (BSE).
There are ultimate stock apps for IPO as well as trading.
Terms discussed below:
1. Angel investors: Angel investors, private investors, and seed investors are all terms used to describe them. They are high-net-worth individuals who provide financial assistance to small businesses or entrepreneurs in exchange for an equity stake.
2. Venture capitalist: Angel investors use their own money and are independent whereas venture capital is an organization who invest money of other individuals.
Angel investors v/s venture Capitals
Angel investors invest their own money and are self-sufficient, whereas venture capital is a company that invests other people’s money.
3. Stock Exchange: The Stock Exchange is a marketplace where brokers help investors buy and sell stocks, bonds, and other securities. The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are two examples of stock exchanges (NSE).
4. Equity Fund: Funds that invest in equities, such as stock, bonds, and mutual funds. These funds will not add to your debt.
5. Debt Fund: A company’s liability is increased by a debt fund. Debentures are a type of debt fund offered by several companies.
6. Institutional Investors: A company or organization that collects funds from other people and invests money on their behalf.
7. Non-institutional Investors: Retail investors is another name for it. They are persons who purchase and sell stocks, bonds, and other securities.
8. Investment Bank: They are also referred to as a merchant bank. They work with businesses, organizations, and cooperative divisions to provide financial services. They keep track of the entire IPO process.
9. Prospectus: When a company issues its first shares, it distributes a prospectus to the general public. This document contains complete information about the company’s goal, business model, offering price, and all other vital information. To present a better picture of the company, no details should be tampered with.
10. Primary market: A marketplace where securities ,i.e, new shares are issued and purchased by investors.
Before understanding IPO benefits and process, let’s understand what is the stage it falls for.
Stage 1. Promoters Fund
Fund that is provided by promoters in initial stage of company. Promoters fund can be
your saving, family fund, etc.
Stage 2. Angel Investors
After, some time company can approach to angel investors for increasing their fund.
Angel investors invest their own amount for future benefits.
Stage 3. Venture Capital Firm and Private Firms
Venture capitals are firms who invest amount for higher returns.
Stage 4. IPO (Initial Public Offerings)
Companies get listed in stock exchange, like BSE/NSE. Investors invest in funds.
Why IPO? What is the need for an IPO?
IPO is the good method to raise fund for the company by selling equity shares. This will make rise in equity fund and not debt fund which is a liability for a company.
- Pare debt → means elimination of debt
- Exit to previous investors → that is promoters
- Raise capital
- Establishment of brand → for better picture of company
Whenever a company need more funds and wish to go public they perform the following steps:
1. Hire an investment Bank
Investment bank is also known as a merchant bank.
Factors considered by companies before hiring investment bank:
- Reputation and Track record
- Quality of research: How they do pricing and valuation of companies
- Distribution expertise: How many tie-ups with institutional investors or how is the marketing strategy
- Prior relationship: Before introducing IPO companies have a relationship with investment bank.
2. Due Diligence and Filings
It is the process perform by investment bank by following all legal procedures.
It is the most important step and also a job of an investment bank.
- Firm Commitment: In firm commitment, investment banks and companies have made a deal that any profit made from accumulating funds will go to the bank, and any losses will be borne solely by the bank.
- Best Effort Commitment: Under this agreement, the investment bank agreed to share all information, including the share issue price, company valuation, and money pricing, as well as distribute the shares.
- Syndicate Underwriting: When a company wants to raise a large sum of money through an initial public offering (IPO). If the amount is 10,000 crores, it will be difficult for a single investment bank to raise such a large sum. Syndicate underwriting is then created by the investment bank.
The investment bank will hire multiple banks and managers. It will allot a specific portion of the funds to be raised by each bank and sell the IPO.
Main book manager or book runner is called as → Lead Manager
2. Red Herring Prospectus
It is a document which contains all relevant details of companies. Like,
- Business and promoters details
- Competitive Advantage
- Capital Structure
- Future Business Plan
- Risk and opportunities
- Past financial data
Prospectus is designed by investment bank.
3. Compliances and Filings
Under this, investment bank must keep in mind all the acts, rules and code of conduct while performing all its job.
- SEBI ( Securities Exchange Board of India )
- NSE (national Stock Exchange)
- BSE (Bombay Stock Exchange)
- Securities Contract (Regulation) Act
- Companies Act
All regulatory bodies rules and acts must be complied.
Listing of companies is done by following rules and code of conduct of SEBI and
Investment banks calculates the valuation of company. For example: Rs 10,000 Cr. is the valuation of company. In which 20% is given as IPO and rest 80% is for promoters and existing investors.
Issue Size: It means amount to be raised from the public. For example: 20% of Rs 10,000 Cr. is 2,000 Cr. Our issue size is Rs2,000 Cr.
Issue Price: In order to raise 20% of public issue we have to create shares unit and set a fixed amount of each share , which is known as Issue price. For example. Rs 200/share.
Number of shares to be issued: 10 Crore. How? 10 crores × 200 = Rs 2,000 Cr.
Lot size: It means company fix minimum amount of shares to be purchased. An individual cannot buy 1 share if company fixes “minimum amount of shares to purchased is 50” and cannot purchase shares on his/her predetermined amount.
Pricing is done in 2 types:
→ Fixed Price Issue
→ Book Building Issue
There is price band set (180-200) to generate market response and can be checked weather valuation is done with utmost precision. Bank will approach institutional and non-institutional investors bid their price and after that a final margin is decided.
180 → The lowest price is know as Floor Price
200 → The highest price is known as Cap price
Difference between the two must be of 20%.
Investment or merchant banks and companies handle distribution. The term “distribution” refers to the act of selling publicly traded stock.
For IPO applications, banks and companies approach QIBs (Qualified Institutional Buyers). They try to attract non-institutional investors to invest in IPOs. They approach retail investors in order to acquire an IPO.
5. Application Process
During the application process, interested investors begin filling out applications for the company’s initial public offering (IPO). Due to the company’s past growth and future plans, there is a potential benefit of oversubscription of shares.
6. Share Allotment
The distribution of shares to the general public, which includes investors, non-institutional investors, and qualified institutional buyers, is referred to as share allotment.
Currently, allotment is done in the percentages listed below.
- 50% to QIBs
- 15% to Institutional investors
- 35% to retail investors
7. Listing on Stock Exchange
Bidding/Offer is open for 3-5 days. Amount is received by UPI, allowed by SEBI or ASBA(application is supported by blocked amount). If you receive your share then oly amount is deducted from your bank account.
You can directly apply for shares from your personal broker. Listing of companies is done within 3 working days after the closing of the IPO.
Issuer ,i.e., company will receive faster access to capital and investors can get early liquidity. If any individual didn’t purchase shares during IPO then he/she can buy it when company gets listed.
IPOs are a more common way for businesses to raise capital. However, you will gain more knowledge. Returns are attractive only to the extent that you conducted financial research.
Always read and understand the prospectus thoroughly, as it is the primary tool for deciding whether or not to invest in the IPO. Make sure you’re familiar with the management and promoter teams.
Before you start buying IPOs, make sure you understand the company’s business model. The main factor that influences decisions is to research the company’s potential, key strengths, and strategy.