What is an IPO?
IPO or an initial public offering is the process by which a company executes its decision to go public by selling its stocks on the bourses. A new, young or old company can decide to go public and hence make a debut on the stock exchanges by means of an IPO. The company offering its shares is called the “issuer” and it lists on the exchange with the help of investment banks. After the IPO, the shares of the company are traded in the open market.
Pricing an Issue
The era of free pricing was introduced in the primary markets in India in 1992. Following this the issuer in consultation with its investment bankers decide upon a price. The company and its investment bankers are however required to make full disclosures and explain the parameters considered for pricing the issue in its red herring prospectus.
There are two types of issuances that can be made in the primary market
- A fixed price issue- where the issuer and merchant banker stipulate a fixed price at which the company should list.
- A book built price- where the company and the merchant banker come up with a price band or a floor price and leave it to the market dynamics to determine the final price. This process of price discovery is called the book building process.
Reservation for different categories of investors in an IPO
In a book built issue allocation is made to different categories of investors. These are retail Investors, non institutional investors (NIIs) and Qualified institutional buyers. The ratio of allocation is 35: 15: 50. In case a book built issue is pursuant to the requirement of 60% allocation to QIBs, the ratio in that case becomes 30:10:60.
The Bidding Process
If you are a retail investor willing to participate in an IPO, you can bid in a book built issue for a value of not more than Rs 1 lakh. Retail investors have the freedom of bidding at the cut off price (a price arrived at that is above the floor price and within the price band). During the time the IPO remains open, you can change or revise your bid by using the form that is made available to you along with your application form. After the book building process is complete, the allotment of shares are carried out.
The Allotment Process
If you have been allotted shares, you are entitled to receive a Confirmatory Allotment Note (CAN) in case you have been allotted shares within 15 days from the date of the closure. On the other hand if you have not been given any share allotment, the registrar of the issue ensures that you receive the refund in your demat account within 15 days.
How should you invest in an IPO?
As an investor, it is easy to get excited by a company that promises to make a sparkling debut on the markets. However there are some vital questions that you must consider before you decide upon investing in an IPO
- Who are the key executives of the company, and what is their track record?
- Is the business model of the company a sustainable one, or is it based on some latest fad or trend?
- Are the growth prospects of the company, justifying the price of the issue?
- What are the probabilities of failures occurring?
- Will you be convinced to hold on to the stock for the long term if there is a sudden and substantial fall in price in the short term?
Is an IPO a good avenue to invest in?
That purely depends upon your financial goals and risk tolerance. You can rely on the research team of Beeline to go through the executive summary, the forward looking statement and the price band to provide a thorough and well researched opinion of the issue on offer. This can help you in making a better investment decision.
