IPO Explained: How Does It Work?

An Initial Public Offering (IPO) serves as a watershed moment for a company. IPOs allow private businesses to access public capital markets. This passage from private ownership to a publicly traded company can create tremendous opportunities to expand, but at the same time, increase scrutiny, regulation, transparency, and market dynamics.

At its core, IPOs provide new capital and the ability to raise a debt. Pledging equity to outside investors provides immediate liquidity and revenue streams even without any conferring debt. New investors receive equity allocation plans and make revenue-sharing arrangements, giving different classification equity.

Now, let us break down the vital concepts, pros and cons, benefits, and procedures related to IPOs to assist new and seasoned investors tackle this important part of the stock market. Also, in case you need some guidance regarding IPO Investing, research, and updates, moneymoksh.com can provide key resources to make useful decisions.

What is an IPO?

An IPO, or Initial Public Offering, is the process where a company first sells its shares to the public and lists them on a stock exchange. A company would typically start as private, meaning that it is solely owned by the company’s founders, early investors, and venture capital firms. A so-called ‘publicly listed’ company (plc) is a company that has gone through the IPO process. Now, it can be traded freely by the general public.

The first and foremost reasoning behind going public: expansion, paying off existing debt, reinvesting into new infrastructure, or making new R&D projects. Furthermore, going through this process gives the company increased reliability as well as a much wider base of investors compared to before.

Why Do Companies Launch IPOs?

Strategically speaking, there are numerous reasons as to why a company might decide to go public:

Raising Capital: Accessing large sums of capital for funding new explosive growth needs to be done through issuing shares.

Brand Recognition: Public perception and awareness is greatly updated when a company announces an IPO.

Liquidity for Existing Shareholders: Early shareholders get the opportunity to effectively monetize shares, thereby greatly increasing their net worth.

Market Valuation: Getting objectively valued by the market allows further strategic moves or capital raising down the line.

Acquisition ‘currency’ – Public companies can acquire other companies by merging with them and using their shares as appreciation ‘currency’ of the acquiring firm.

From Private to Public – The IPO Process

The IPO process is heavily regulated and somewhat complicated. Below is a very simplified explanation with only the major points:

Hiring an Investment Bank: The company selects one or more investment banks (called underwriters) to manage the IPO

Due Diligence & Filings: The underwriters conduct extensive due diligence, and the company files a Draft Red Herring Prospectus (DRHP) with the market regulator (in India, that’s SEBI).

Roadshows & Marketing: The company and its bankers conduct roadshows to generate interest among institutional investors.

Pricing the Issue: A price band is determined for the shares, or in some cases, a fixed price is set.

IPO Launch: The IPO opens for subscription to retail, institutional, and high-net-worth investors.

Allotment & Listing: After allotment, the shares are listed on the stock exchange, and trading begins.

moneymoksh.com also provides services such as in-depth tracking of IPOs, analysis, and information on listings.

Types of IPOs

1. Book Building Issue

The issue does not have a predetermined price.

Price band is set such as minimum of ₹100 and maximum of ₹110.

Investors submit bids in the specified range.

After an assessment of demand for the bids mitigation criteria, the apex bank sets the final price which might be lower the price range set.

2. The Fixed Price Problem

The share price is set as a fixed rate prior to the issue date.

Investors are well informed by the time that they are applying.

3. Offer for Sale (OFS)

Current shareholders sell some of their shares.

The company does not gain any new capital; the funds go from the selling shareholders.

IPO Classifications for Investors

An IPO is scoped out to 3 classes of investors:

Retail Individual Investors (RIIs):

Can invest up to ₹2 lakh.
Usually set aside a minimum of 35% of the total issue.

Qualified Institutional Buyers (QIBs):

Encompasses mutual funds, insurance companies, and pension funds.
Received approximately 50% of the issue.

Non-Institutional Investors (NIIs):

High net worth individuals (HNIs) who invest more than ₹2 lakh.
Set aside about 15% of the issue.

Advantages of Investing in IPOs

First-Mover Advantage: Investors can enter at a rock bottom price before the company’s full potential is baked into the stock.

High Return Potential: Many IPOs are listed at a greater value than the company’s last private funding round, guaranteeing profits on listing day.

Diversification: Emerging IPOs offers diversification from established stocks.

Participation in Success Stories: Investing into early stage public companies presents an opportunity to be part of future success stories.

Initial Public Offering Risks

As likely as the gains might be, IPOs are not risk free:

Market Swings: There is no guarantee that listing gains will happen. Some IPOs start trading at prices lower than the issue price, causing loss from day one.

Absence of Historical Information: There is insufficient track record on newly listed securities, making it difficult to evaluate the long-term prospective growth.

Overpricing: Companies may set exorbitant prices for IPOs, leading to listing price corrections on tamped bull markets.

Lock-in Timeframes: Some investors may face lock-in timeframes where selling shares is restricted.

Steps to Apply for an IPO

Modern UPI payment systems along with Indian websites have made applying for IPOs simple. Follow these easy steps:

Demat Account: Have an active trading and demat account.

Select an IPO: Check for upcoming IPOs in websites such as NSE/BSE or other financial news websites.

Bid Submission: Submit applications through your broker or make use of your bank’s ASBA (Application Supported by Blocked Amount) Feature.

Input a specific lot size, number of shares, and price you are willing to pay for the shares.

UPI Transactions: Give approval to the mandate through your UPI application in order to block the stipulated bid amount.

Shareholder Meetings Status: View registry websites like Link Intime and KFintech for allotment status.

Listing: The shares, if allotted, get credited to your demat account before the listing date.

Remember, it’s up to you to perform background checks. Alternatively, rely on moneymoksh.com for invaluable IPO insights and evaluations.

IPO vs. FPO vs. OFS

Notable Indian IPOs

Over the years, India has witnessed several landmark IPOs:

• Reliance Power (2008): Hyped heavily but disappointed post-listing.
• Zomato (2021): One of the first major new-age tech IPOs.
• LIC (2022): India’s largest IPO by issue size.
• Nykaa & Paytm: Mixed post-listing performance, highlighting IPO risks.
  

Final Thoughts

An IPO offers a unique opportunity to invest in a company at the beginning of its public journey. However, it’s not just about the hype—wise investors evaluate the company’s fundamentals, growth potential, and market conditions before investing.

Whether you’re a beginner or a seasoned market participant, staying updated on IPO news, reviewing DRHPs, and analyzing company prospects is essential. For reliable insights, upcoming IPO calendars, and allotment tracking, head to moneymoksh.com—your go-to destination for market wisdom.

want to know more visit – www.moneymoksh.com