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  • Initial Public Offering (IPO)
    Definition
    Initial Public Offering refers to the selling of shares by a private company to the public for the first time. Initial Public Offering is a source of funds raised from the primary market. All subsequent public offerings are known as Follow-on Public Offerings or Secondary Market Offerings.
    An IPO is an abbreviation for Initial Public Offer. When a company goes public for the first time or issues a fresh stock of shares, it offers it to the public directly. This happens in the primary market. The primary market is where a company makes its first contact with the public at large.
    Why Companies Bring IPO?
    There are mainly any of the two purposes behind an IPO 1. ESTABLISHING NEW BUSINESS 2. EXPANSION OF EXISTING BUSINESS
    Companies, new as well as old, can offer shares to the investors in the primary market. This kind of tapping the savings is called an IPO (Initial Public Offering). SEBI regulates the way in which the companies can make this offering.
    Red Herring Prospectus (RHP)
    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details about an investment offering for sale to the public. A prospectus should contain the facts that an investor needs to make an informed investment decision.
    Also known as an "offer document".
    More on RHP
    RHP contains all the information and factor which can influence the decision of an investor. Like
    1. Where the company will use the funds so raised
    2. Companies previous records
    3. Promoters track records
    4. Companies current, likely profit and EPS
    5. Companies future plan
    The investor should thoroughly go through RHP before subscribing the issue. RHP is available at SEBI’s and merchant banker’s website. It may be available in physical form at broking houses
    Process of IPO
    Method of IPO:
    When a Company Floats IPO, it Print forms for application to be filled by investor.
    Public Issues are open for a few days only, in the method of IPO company gives a price band. The subscriber can bid any where within the range of price band. An applicant has to fill complete application form, accompanied by cash, cheque, D.D. and to be deposited before the closing date. This is the most popular of IPO which is BOOK BUILDING.
    As per the instruction on the form all the qualitative and quantitative factor related to the IPO, offering company, promoters and parties to the issue are disclosed in a document
    Book Building
    Book building is a process of price discovery used in Initial Public Offering. As per SEBI guidelines, Book Building is defined as "a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built-up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document". Investors bid at different prices which may be equal to or more than the floor price and the issue price of shares is determined at the end of the bidding period.
    Process of Book Building
    In book building IPO method the final prices at which shares are allotted is determined by investors. The issuing company gives a price range which consist of a higher price and a lower price. Lower price is known as floor price. The higher price is said to be the cap price. And this range is called price band. The investor can apply anywhere between the price range. On receiving all the application the company calculate average price at which majority of application are received. This is the final price
    Bought out Deals
    A bought out deal is a deal in which the company sells its shares to an agent or a merchant banker, this merchant banker then offloads or sells the shares at an appropriate time.
    A new share issue that is bought entirely by one underwriter to resell to investors.
    An underwriter will only do a bought deal if it is confident there is enough demand for the shares.
    Private Placement
    Raising of capital via private rather than public placement. The result is the sale of securities to a relatively small number of investors. Investors involved in private placements are usually large banks, mutual funds, insurance companies, and pension funds.
    Since a private placement is offered to a few, select individuals, the placement does not have to be registered with the Securities and Exchange Commission. In many cases detailed financial information is not disclosed and a the need for a prospectus is waived. Finally since the placements are private rather than public, the average investor is only made aware of the placement usually after it has occurred.
    Who are Underwriters
    An underwriter to the issue could be a banker, broker, merchant banker or a financial institution. They give a commitment to underwrite the issue.
    Underwriting means they will subscribe to balance share if all the shares offered at the IPO are not picked up.
    Suppose there is an issue for Rs. 100 crore and subscriptions are received only for 90 crore. It is then left to the underwriter to pick up the balance Rs. 10 crore.
    If underwriters don’t pay up SEBI will cancel their licenses.
    What to look for before investing in an IPO
    1. Valuation: First thing to look at is how aggressively the IPO is Priced. The more aggressively it is priced the lesser the chances of price appreciation.
    2. Promoter’s Goodwill: the Promoter’s Goodwill is an important parameter in analyzing an IPO as a goodwill creates trust in taking decision for applying for an IPO.
    3. Broker’s Report: Brokers can provide an investor with all the info he needs on the co. so an investor must take advice from his stock broker before applying for an IPO.
    4. Ratings: SEBI has now made it mandatory for every co. to get its IPO rated through any approved rating agencies like CRISIL, ICRA etc. but remember that it does not provide guarantee of success.