Now that we have discussed so much about stocks, different types of stocks, types of markets, let us talk about the term from where this chain of buying and selling of stock starts, that is IPO or Initial Public Offering.
An Initial public offering(IPO), referred to as an “offering” or “floating”, is a process where a company called issuer issues shares to the public for the first time. What do this “issues share” means, well it simply means that the company is selling ownership or sharing the ownership with public or investors?
The public or investors buy this ownership or shares and in this way, the company gets to raise capital.IPOs are often issued by smaller, younger companies seeking capital to expand but can also be done by large privately owned companies seeking to become publicly traded.
Why a company goes for an IPO?
A company goes for IPO because it wants to expand itself.When I say “expansion” I simply mean that suppose your company is doing great and now you want to set up a few more factories and for this you definitely need capital.
Where would you get this capital from?
Well, suppose you have taken a lot of loans from the bank and you don’t want to take any more loans that mean you don’t want to add to your debt.What you can do is you can sell a part ownership of your company to the public at large.
The public will buy ownership or buy the shares and you will get the capital and with this capital, you can set up the extra factories that you wanted to.
When a company thinks of going public that is when a company takes the decision that it will sell some percentage of company’s share to the public, it has to follow few steps to make this decision work, these are:
Appointing an Investment bank
Appointing an investment bank is the first and the most fundamental process that the company does when it thinks of IPO.The company selects a bank to be it ICICI Bank, IDBI Bank or SBI, all of these banks have an investment division which takes care of these things.
Investment banks are just like the middleman between the company that wants to go for IPO and the public.
The company and the investment banks will meet to discuss that how much money the company will raise, the types of securities and all the other issues that are there in the underwriting agreement.
Few of the biggest investment banks in the world are Morgan Stanley, Goldman Sachs, First Boston.
Registration forms to SEBI
Securities and Exchange Board of India(SEBI) is safeguarding investors all over India.SEBI is an autonomous body independent from exchanges, independent from brokers.If you go to the SEBI’s website its mission statement states that “Its sole purpose is to provide transparency and protect the investor”.
SEBI is similar to SEC that is Securities and Exchange Commission which is an agency of the United States federal government with goals of protecting investors, maintaining the fair and orderly functioning of securities markets, and facilitating capital formation.
So once the Investment bank applies to SEBI with its registration statement and SEBI approves it then this step is done, that is the registration of the company for IPO is done.
Red herring prospectus
Red herring prospectus, a name which unlike its work sounds peculiar.Red herring prospectus helps the investors to know the company, this includes details about its promoters, the reason for raising the money, how the money will be used, risks involved with investing in the company, financial history, future plans and so on.
But it must also be clearly mentioned that Red herring prospectus does not have the details of whether price or number of shares being offered or the amount of issue.
So, if you are an investor who wants to invest in an IPO then the Red herring prospectus is where you need to go first.The good thing about Red herring prospectus is it covers everything from start to finish, in fact, the underwriters who are involved in the IPO process are also stated in it.
As Mark Twain says that lots of little matter were made large by the right type of marketing.
Marketing is among the very crucial variables in IPO. A firm allocates a large part of its own funds to marketing the reason being, public perception consistently enhances and helps you to generate hype in the marketplace, which is consistently good since that is where the need is coming from. It essentially helps in better listing cost in BSE and NSE when the business gets recorded.
Should you take the case of few of the very successful IPOs of the past as Facebook and Twitter they also followed this mantra of the ad.
Price band set by investment bank
A price band is a range of price having an upper and lower limit, for example, Rs 50 to Rs 55 per share.This means the buyers must bid at least Rs 50 a share for the first issues of shares.
The investment bank with the agreement of particular company decides the price band depending on the hype in the market for IPO.Setting up the price band is a crucial task as depending on that the investors invest in the stock.
Listing on the stock exchange
There are few eligibility criteria for both BSE and NSE which the company must meet to get itself listed on the exchange.The company has to shed private limited from its name and add public limited to it when applies for listing itself in the exchange.
Once the company is listed on the exchange, then the whole game of buying and selling stock begins.
This is how a company metamorphosized from being a private limited to being a public limited.