IPO (Initial Public Offer)
The Primary Market, also known as the new issue market or Initial Market, in primary Market newly
issued securities offer and sold to the public for the first time and this process is known as IPO
(initial public offer).
Primary market facilitates the capital-raising process for companies and governments. It allows them
to issue and sell securities to the public to generate funds for various purposes.
Primary market involves issuers, such as companies or governments, and investors. Companies issue new
securities to raise capital for expansion, debt repayment, or other financial needs, Investment banks
and underwriters play a crucial role in the primary market. They help companies navigate the IPO process.
Investing in IPOs can be a smart move if you are an informed investor. But not every new IPO is a great
opportunity. Benefits and risks go hand-in-hand. Before you join the bandwagon, it is important to understand
the basics.
An IPO is generally initiated to infuse the new equity capital to the firm, to facilitate easy trading of the
existing assets, to raise capital for the future or to monetize the investments made by existing stakeholders.
The institutional investors, high net worth individuals (HNIs) and the public can access the details of the
first sale of shares in the prospectus. The prospectus is a lengthy document that lists the details of the
proposed offerings.
Once the IPO is done, the shares of the firm are listed and can be traded freely in the open market. The stock
exchange imposes a minimum free float on the shares both in absolute terms and as a ratio of the total share
capital.
Advantages of Investing in IPO
Investing in IPOs comes with so many extra merits. Here are a few of the benefits you must know before
making your investment decision.
Investing in an IPO withholds the following advantages-
Listing Gains : One of the benefits of investing in an IPO is gain on a listing day. Companies
get their stock valued and mention the offer price in the prospectus. An investor can apply for a
particular number of shares at that specific price. If the share price on a listing day is trading higher
than the price paid when applied for IPO, it is called the listing gain.
Liquidity : Investors can sell the stocks in the open market once the company goes public. This
allows investors to realise gains without waiting for shares to be repurchased. Since the investors can
buy and sell stocks anytime, it increases their liquidity.
Chance to Small Retailers : SEBI has made several rules and regulations to ensure that small retail
investors get a fair chance to invest in an IPO. Sometimes, a small investor may not get this chance in
the secondary market.
IPO Norms : The IPO markets are safe and professional, thereby protecting retail investors. The
company’s prospectus consists of all information like performance, financials, growth, risks and future
plans. Hence, this gives investors enough information to decide to invest in an IPO.
Transparency : Anyone investing in an IPO and receiving shares allotment becomes a company
shareholder. The company owners ensure to keep their investors invested with them. Also, the company plans
to achieve its goals and reach profit levels as promised to investors and analysts. The stock price will
rise or fall depending on the company’s performance.
Economical : SEBI has developed an application that supports block amounts for IPO. This application
ensures that the money is debited from your account only after the shares are allotted. The money continues
to earn interest in your account till the allotment day. However, this is not the case in the secondary market,
where the amount is debited immediately after purchasing shares.
Shareholder Ownership Authority : When you invest money in a company, you procure the voting rights
in the company general meetings. For instance, the company you invested in announces in their annual general
meeting that it will expand its operations to increase its profitability. As an equity share holder, you have
the right to vote against such a decision.
Buying Cheap : The IPO is often at the lowest price, especially when you invest in a small company
that has the potential to grow big. This is because the company offers its shares at a discounted rate.
Hence, you can take an opportunity through an IPO because it may be difficult to buy shares when the prices
increase.
Terms Associated with IPO
To have informed knowledge about an IPO, it is necessary that one must know about some basic terms used in the
process. Some of the commonly used terms are provided in the table below:
| Terms |
Descriptions |
| Issuer |
An issuer can be the company or the firm that wants to issue shares in the secondary market to
finance its operations. |
| Underwriter |
An underwriter can be a banker, financial institution, merchant banker, or broker. It assists the
company to underwrite their stocks.
The underwriters also commit that they will subscribe to the balance shares if the stocks offered
at IPO are not picked by the investors.
|
| Fixed Price IPO |
Fixed Price IPO can be referred to as the issue price that some companies set for the initial sale of
their shares. |
| Price Band |
A price band can be defined as a value-setting method where a seller offers an upper and lower cost
limit, the range within which the interested buyers can place their bids.
The range of the price band guides the buyers.
|
| Draft Red Herring Prospectus (DRHP) |
The DRHP is the document that lets the public know about the company’s IPO listings after the approval
made by SEBI. |
| Under Subscription |
Under Subscription takes place when the number of securities applied for is less than the number of
shares made available to the public. |
| Oversubscription |
Oversubscription is when the number of shares offered to the public is less than the number of shares
applied for.
|
| Green Shoe Option |
It refers to an over-allotment option. It is an underwriting agreement that permits the underwriter to
sell more shares than initially planned by the company. It happens when the demand for a share is seen
higher than expected. |
| Book Building |
Book building is the process by which an underwriter or a merchant banker tries to determine the price
at which the IPO will be offered.
A book is made by the underwriter, where he submits the bids made by the institutional investors and fund
managers for the number of shares and the price they are willing to pay.
|
| Flipping |
Flipping is the practice of reselling an IPO stock in the first few days to earn a quick profit. |
Any individual who is an adult and is capable of entering into a legal contract can serve the eligibility norms to
apply in the IPO of a company. However, there are some other inevitable norms an investor needs to meet.
The eligibility criteria are-
- It is required that the investor who is interested in buying a share in an IPO has a PAN card issued
by the Income Tax department of the country.
- One also needs to have a valid Demat account.
- It is not required to have a Trading Account, Demat account serves the purpose. However, in case an
investor sells the stocks on listings, he will need a trading account. Therefore, it is often advised
to open a trading account along with the Demat account when an investor is looking forward to investing
in an IPO for the first time.
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