IPO

IPO or Initial Public Offer is a way for a company to raise money from investors for its future projects and get listed to Stock Exchange. Or An Initial Public Offer (IPO) is the selling of securities to the public in the primary stock market.

From an investor point of view, IPO gives a chance to buy shares of a company, directly from the company at the price of their choice (In book build IPO's). Many a times there is a big difference between the price at which companies decides for its shares and the price on which investor are willing to buy share and that gives a good listing gain for shares allocated to the investor in IPO.

From a company prospective, IPO help them to identify their real value which is decided by millions of investor once their shares are listed in stock exchanges. IPO's also provide funds for their future growth or for paying their previous borrowings.

Primary market is the market where investors can buy shares directly from the issuer company to raise their capital.

Secondary market is the market where stocks are traded after they are initially offered to the investor in primary market (IPO's etc.) and get listed to stock exchange. Secondary market comprises of equity markets and the debt markets. Secondary market is a platform to trade listed equities, while Primary market is the way for companies to enter in to secondary market.

Company with help of lead managers (merchant bankers or syndicate members) decides the price or price band of an IPO.

SEBI, the regulatory authority in India or Stock Exchanges do not play any role in fixing the price of a public issue. SEBI just validate the content of the IPO prospectus.

Companies and lead managers does lots of market research and road shows before they decide the appropriate price for the IPO. Companies carry a high risk of IPO failure if they ask for higher premium. Many a time investors do not like the company or the issue price and doesn't apply for it, resulting unsubscribe or undersubscribed issue. In this case companies' either revises the issue price or suspends the IPO.

Once ‘Draft Prospectus' of an IPO is cleared by SEBI and approved by Stock Exchanges then it's up to company going public to finalize the date and duration of an IPO. Company consult with the Lead Managers, Registrar of the issue and Stock Exchanges before decides the date.

Registrar of a public issue is a prime body in processing IPO's. They are independent financial institution registered with SEBI and stock exchanges. They are appointed by the company going public.

Responsibility of a registrar for an IPO is mainly involves processing of IPO applications, allocate shares to applicants based on SEBI guidelines, process refunds through ECS or cheque and transfer allocated shares to investors Demat accounts.

Stage 1: Draft Offer document
"Draft Offer document" is prepared by Issuer Company and the Book Building Lead Manager of the public issue. This document is submitted to SEBI for review. After reviewing this document either SEBI ask lead managers to make changes to it or approve it to go ahead with IPO processing.

"Draft Offer document" is usually a PDF file having information of an investor who needs to know about the public issue. It mainly contain information about the company, its business, management, risk involve in applying to this issue, company financials and the reason why company is raising money through IPO.

Stage 2: Offer Document
Once the ‘Draft Offer document' cleared by SEBI, it becomes "Offer Document". Offer Document is the modified version of ‘Draft Offer document' with SEBI suggestions.

"Offer Document" is submitted to the registrar of the issue and stock exchanges where Issuer Company is willing to list.

Stage 3: Red Herring Prospectus
Once "Offer Document" gets clearance from Stock Exchanges, Issuer Company add Issue size and price of the issue to the document and make it available to the public. The issue prospectus is now called "Red Herring Prospectus".

Initial Public Offering can be made through the fixed price method, book building method or a combination of both.

Difference between shares offered through book building and offer of shares through normal public issue (Source: BSE).

Pricing
Fixed Price Process: Price at which the securities are offered/allotted is known in advance to the investor.
Book Building Process: Price at which securities will be offered/allotted is not known in advance to the investor. Only an indicative price range is known.

Demand
Fixed Price Process: Demand for the securities offered is known only after the closure of the issue.
Book Building Process: Demand for the securities offered can be known everyday as the book is built.

Payment
Fixed Price Process: Payment if made at the time of subscription wherein refund is given after allocation. Book Building Process: Payment only after allocation.

Company coming up with Book Building Public Issue decided a price band for the issue. The price band usually contains an upper level and a lower level.

Floor Price is the minimum price (lower level) at which bids can be made for an IPO.

Investors can bid for the Book Build IPO at any price in the price band decided by the company. In Book Build process retail investors have an addition option to choose "Cut-Off" price for bidding.

Cut-off price means the investor is ready to pay whatever price is decided by the company at the end of the book building process. Retail investor has to pay the highest price while placing the bid at Cut-Off price. If company decides the final price lower then the highest price asked for IPO, the remaining amount is return to the retail investor.

Follow on public offering (FPO) is public issue of shares for already listed company. An FPO is a stock issue of additional shares made by a company that is already publicly listed and has already gone through the IPO process.