What is IPO?: Everything You Need to Know about IPOs in India

We will understand the Basics of IPO in this post in a Question and Answer format.

What is an IPO?

An Initial Public Offering (IPO) is a significant event for a company, marking its debut on the stock market. It involves the company offering new shares to the public, allowing both individual and institutional investors to become shareholders.

Managed by investment banks, the IPO sets the initial share price, determining the company’s market value. The funds generated from this offering play a crucial role in the company’s growth strategies, such as expanding operations or settling debts.

Exploring what an IPO entails is key for investors looking to engage in this exciting opportunity in the financial market

What is IPO in Indian Prospective?

In India, an IPO is like a big moment for a company. It’s when a company changes from being privately owned to becoming a part of the stock market that everyone can join. Think of it as a company’s way of inviting everyone to buy a piece of it by selling shares.

Let’s say there’s a successful Indian company that makes cool technology stuff. If they want to grow even more or do new exciting things, they might decide to have an IPO. During this process, they offer new shares to the public, and people, both regular folks and big investors, can buy these shares.

The whole process in India is carefully watched over by Securities and Exchange Board of India (SEBI) a government body that makes sure everything is fair and square in the stock market. SEBI is like the referee, making sure companies play by the rules.

Going for an IPO isn’t just about getting money for the company. It’s also like a company’s way of saying, “Hey, we’re doing great things, and we want everyone to be a part of it.” Investors get to own a bit of the company, and in return, they hope the company will keep growing and doing well.

This idea of companies going public in India has become really popular. All sorts of companies, from tech companies to banks and factories, are doing it. It’s like they’re opening their doors to lots of people who want to be a part of their journey and success.

Why Are IPOs Launched? What Is the Need for Launching IPOs?

Imagine you have a favorite local bakery that’s been making amazing pastries for years. Now, picture that bakery deciding to open its doors to the entire town by having a big grand opening. This is kind of like what happens when a company decides to have an IPO.

So, why do companies go through all the trouble of launching an IPO? Let’s break it down:

1. Money for Growth: Just like the bakery might need extra funds to open a new branch or make even better pastries, companies use IPOs to get more money. This money is like fuel for them to grow—whether it’s expanding to new places, making new products, or hiring more talented people.
2. Paying Off Debts: Sometimes companies have loans or debts they want to clear. Having an IPO is a way for them to raise money and pay off those debts, so they can start fresh and focus on making their business even better.
3. Inviting Everyone to the Party: Think of an IPO as a big invitation to a party. By going public, companies say, “Hey, everyone, we’re doing something exciting, and we want you to be a part of it!” This is a way for regular people, not just big investors, to own a piece of their favorite companies.
4. Currency for Deals: Having shares that people can buy and sell gives companies a kind of currency. It’s like having special money that they can use to make deals or partnerships with other companies.
5. Employee Benefits: When a company goes public, it’s not just the big bosses who benefit. Employees often get a chance to own some shares too. So, when the company does well, everyone, from the CEO to the newest employee, can feel like they’re a part of that success.

In a nutshell, IPOs are like a company’s way of saying, “We’re ready for the next big step, and we want you to join us on this journey.” It’s a win-win—companies get the funds they need to grow, and people like you and me get a chance to be a part of their success story.

How IPOs of a Company are Valued?

1. Understanding the Company’s Worth:

• Just like you’d consider the features and uniqueness of your new gadget, the company and its financial experts evaluate everything about the business. This includes its earnings, assets, debts, growth potential, and position in the industry.

2. Financial Statements:

• Think of it as looking at your shop’s sales records and expenses. The company prepares detailed financial statements—like the profit and loss statement and balance sheet—to show its financial health to potential investors.

3. Comparing with Peers:

• It’s like checking out the prices of similar gadgets in other shops. The company compares itself with similar businesses in the industry to see if it’s priced competitively.

4. Market Conditions:

• Just as you’d consider how much people are willing to pay for gadgets in the market, the company and its financial advisors analyze current market conditions. This includes economic trends, interest rates, and the overall mood of investors.

5. Setting the Offering Price:

• Imagine you deciding the final price tag for your gadget. The company, with the help of investment banks, sets the offering price for its shares. This is the price at which investors can buy the shares during the IPO.

6. Investor Demand:

• Like customers showing interest in your new gadget, investors indicate how much they want to buy the company’s shares. The demand from investors can affect the final value of the shares.

7. Book-Building Process:

• Think of it as taking pre-orders for your gadget. In the book-building process, investors bid for shares before the IPO, helping the company gauge demand and set the final offering price.

8. Underwriter’s Role:

• Just as you might work with a trusted supplier for your gadgets, the company collaborates with underwriters (investment banks) who help with the valuation process. They ensure everything is in order and manage the IPO journey.

LIfe Cycle of an IPO

The life cycle of IPO of a Company involves following phases;

1. Company Decision:

• Just like our shop deciding to open its doors to a wider audience, a company decides it’s time to share its ownership with the public.
• The company works with investment banks to help manage the entire IPO process.

2. Regulatory Approval:

• Before the grand opening, there are some checks and balances. In the business world, it’s the Securities and Exchange Board of India (SEBI) that reviews and approves the company’s plans.

3. Valuation and Share Price:

• Imagine the shop determining the price of their new products. Similarly, the company, with the help of investment banks, figures out the value of its shares and sets an offering price.

4. IPO Roadshow:

• Our shop might host events to showcase its new products. Similarly, the company goes on an IPO roadshow, where it presents itself to potential investors. This helps generate interest and excitement.

5. Allotment of Shares:

• Once the excitement builds up, it’s time to allocate shares. Investors who want to be a part of this grand opening apply for shares, and the company decides who gets how many.

6. Listing on the Stock Exchange:

• The big day arrives—the grand opening! The company’s shares are listed on a stock exchange, like a product appearing on the shelves of our favorite shop.

7. Trading Begins:

• Just as customers rush to buy the new products, investors start buying and selling the company’s shares on the stock exchange. This is where the value of the shares is determined by the market—how much people are willing to pay for them.

8. Post-IPO Life:

• The grand opening isn’t a one-day affair. After the IPO, the company continues its journey as a publicly traded entity. Its shares are now available for trading every business day.

What Happens after IPO?

1. Shares Are Now Public:

• After the grand opening (IPO), the company’s shares are no longer exclusive. They are available for anyone to buy and sell on the stock exchange.

2. Market Forces Take Over:

• Just like people deciding how much they’re willing to pay for the new products at the shop, investors in the stock market determine the value of the company’s shares. This is influenced by factors like demand, supply, and how well the company is doing.

3. Everyday Trading:

• Unlike the grand opening day, where there’s a big rush, trading in the stock market happens every business day. Investors can buy or sell the company’s shares based on their expectations and the company’s performance.

4. Quarterly Reports:

• Picture the shop giving regular updates on how well their new products are doing. Similarly, the company, now a public entity, must provide quarterly reports. These reports include financial details and give investors a closer look at how the company is performing.

5. Shareholder Meetings:

• Just as the shop might have customer feedback sessions, companies hold shareholder meetings. Here, investors get a say in important decisions and learn about the company’s plans.

6. Growth and Challenges:

• Companies continue their journey, facing both opportunities and challenges. They might use the money raised from the IPO to expand, innovate, or overcome hurdles.

7. Corporate Governance:

• This is like the shop maintaining good business practices. Companies, now accountable to a broader group of shareholders, focus on good governance, transparency, and responsible business conduct.

8. Dividends and Rewards:

• If the shop makes a profit, they might share some of it with their employees or investors. Similarly, companies may offer dividends—sharing a portion of their profits—with their shareholders.

Types of IPOs

When a company plans its grand opening on the stock exchange, it can choose between a Fixed Price Issue and a Book Building Issue as different strategies to launch its Initial Public Offering (IPO).

Fixed Price Issue: In a Fixed Price Issue, the company decides on a specific and unchanging price at which it will offer its shares to the public. This predetermined price is communicated to investors in advance, simplifying the process and providing clarity. Investors know exactly how much they need to pay for each share, making it easier for them to plan their investments. While this approach offers transparency, it may not fully capture the market demand dynamics as the price is fixed irrespective of investor interest.

Book Building Issue: On the other hand, a Book Building Issue introduces a more dynamic and flexible approach to pricing. The company, with the help of investment banks, sets a price range within which investors can bid for shares. Investors indicate the price they are willing to pay, and the final offering price is determined based on the demand generated during the bidding process. This method allows the company to gauge investor sentiment and potentially capture a higher market value for its shares if demand is strong.

Below table explains the difference between Fixed Price issue an Book Building Issue in tabular form.

Advantages of IPO:

1. Access to Capital: One of the primary advantages of an Initial Public Offering (IPO) is the significant infusion of capital into the company. By going public, a company can raise funds from a diverse set of investors, providing the financial resources needed for expansion, innovation, and other growth initiatives.
2. Enhanced Visibility and Prestige: Going public brings a company into the public eye, increasing its visibility and credibility. Being listed on the stock exchange can enhance a company’s reputation and attract attention from customers, partners, and the media.
3. Liquidity for Existing Shareholders: For existing shareholders, especially early investors and employees, an IPO provides an opportunity to sell their shares and realize the value of their investment. This liquidity can be particularly beneficial for founders and employees who may have equity stakes in the company.
4. Currency for Mergers and Acquisitions: Publicly traded shares can be used as a form of currency in mergers and acquisitions. This provides the company with a valuable tool for strategic expansion and business development.
5. Employee Benefits and Stock-Based Compensation: Going public allows companies to attract and retain top talent by offering stock-based compensation to employees. This can align the interests of employees with the company’s overall success.

Disadvantages of IPO:

1. Costs and Regulatory Burden: The process of going public can be expensive, involving significant costs related to legal, regulatory compliance, and underwriting fees. Additionally, being a publicly traded company involves ongoing compliance with regulatory requirements, which can be time-consuming and costly.
2. Loss of Control: Founders and early stakeholders may experience a loss of control over the company’s decision-making processes. Public companies are accountable to a broader set of shareholders, and strategic decisions may require approval from the shareholders.
3. Short-Term Focus: Public companies often face pressure to deliver strong short-term results, leading to a focus on quarterly performance. This can potentially limit long-term strategic planning and innovation.
4. Market Volatility: The value of a company’s shares in the stock market is subject to market forces and investor sentiment. Market volatility can lead to fluctuations in share prices, impacting the perceived value of the company.
5. Increased Scrutiny and Disclosure Requirements: Public companies face heightened scrutiny from regulatory authorities, analysts, and the media. There are stringent disclosure requirements, and the company’s financial performance and business operations become more transparent, which may not always align with the company’s desire for confidentiality.

Types of IPO Investors in India:

Below are the major types of categories of IPO investors in India.

1. Qualified Institutional Buyers (QIBs):

• QIBs are sophisticated institutional investors with a significant financial capacity. This category includes mutual funds, insurance companies, pension funds, and other large financial institutions. QIBs typically invest substantial amounts in IPOs, bringing stability and credibility to the company’s public debut.

2. Retail Individual Investors (RIIs):

• RIIs represent individual investors who participate in the IPO process. These are regular people like you and me who have the opportunity to buy shares of the company. IPOs often allocate a portion of the shares specifically for retail investors, allowing them to be part of the grand opening.

3. Non-Institutional Investors (NIIs):

• NIIs are a diverse group of investors who are not institutions. This category includes high-net-worth individuals (HNWIs) and retail investors who choose to invest larger amounts in the IPO. NIIs, like QIBs, contribute to the overall demand for shares during the IPO process.

How to Check Upcoming IPOs:

One can check the upcoming IPOs through various means. Our website itself has the section on Upcoming IPOs . Visit this page regularly to know more about the new IPOs.

Apart from this, you can also get the details through below means.

1. Financial News Websites:
   • Check financial news websites regularly.
2. Stock Exchange Websites:
   • Visit the official website of stock exchanges.
3. SEBI Website:
   • Explore SEBI’s website.
4. IPO Tracking Websites:
   • Use IPO tracking websites for allotment and IPO subscription details
5. Brokerage Platforms:
   • Check with your brokerage platform.
6. Registrar of Companies (ROC):
   • Explore the Registrar of Companies website.
7. SEBI-Registered Investment Advisors:
   • Consult SEBI-registered investment advisors.

Things to consider before investing in IPOs:

Investing in an Initial Public Offering (IPO) is like being part of a grand opening for a company on the stock market stage. It’s an exciting opportunity, but before you jump in, here are some important things to keep in mind in simple terms:

1. Do Your Homework: Before the grand opening, study about the company—what it does, how it makes money, and its growth potential. Look for details in the IPO prospectus, a document that companies share with potential investors.
2. Understand the Risks: Every investment comes with some risks. Think of it like trying a new dish at your favorite restaurant—you might love it, or it might not be your taste. Be aware of the risks involved in the company’s industry, competition, and overall market conditions.
3. Check the Financials: Just like you’d IPO review your own budget, look at the company’s financial health. Check its profits, debts, and how it compares to others in the same business.
4. Know the Purpose of the IPO: Understand why the company is going public. Is it to expand, pay off debts, or for some other reason? Knowing the purpose can give you insights into the company’s future plans.
5. Look at the Price: Consider the price at which the company is offering its shares. Is it reasonable compared to similar companies in the market? Don’t just follow the hype—think about whether the price makes sense for the value you’re getting.
6. Consider the IPO Allotment Process: During the IPO, there’s a process of allocating shares to investors. Know how this works and what portion of shares you might get. This is like knowing how many slices of cake are available at a party.
7. Don’t Put All Your Eggs in One Basket: Diversify your investments. It’s like not putting all your money on a single horse in a race. Spread your investments across different assets to reduce risk.
8. Stay Informed: Keep an eye on the IPO news and updates about the company and the overall market. Being informed is like having a map during a journey—it helps you navigate and make better decisions.
9. Long-Term or Short-Term?: Decide if you’re in it for the long haul or looking for a quick win. Your investment strategy should align with your financial goals.
10. Consult Professionals: If you’re unsure, seek advice. Talk to financial advisors or professionals who can guide you. It’s like asking for directions when you’re not sure about the way.

Commonly Used Terms about IPO:

Final Thoughts:

We’ve taken a cool journey into the basics of Initial Public Offerings (IPOs), where companies throw a big party by going public. It’s not just about getting cash; it’s like a strategic move for companies to become famous and share their success stories.

For us, the regular folks, it’s a chance to join the party and be part of a company’s big debut in the stock market. We’ve covered some lingo, like face value and cut-off price, and explored the world of IPOs through easy-to-understand FAQs.

Whether you’re figuring out IPOs vs FPOs or checking out different prospectus forms, this adventure is all about making smart choices. As companies share their shares with the world, our story goes beyond the big debut. We stick around, staying smart and looking at the long-term picture.

To sum it up, IPO basics are like a cool story of growth, chances, and teamwork. It shows how money stuff works and how companies and people team up for success. So, as you step into the IPO world, enjoy the ride, soak in the knowledge, and get ready for the future fun!

FAQs about Basics of IPO in Indian Prospective:

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