Today, we will learn about What are IPOs Definition? in this article.
When you read that a company is planning to launch an IPO,
it means that a private business has decided to issue shares to the general public for the first time.
First of all, this is the time when a private company decides to proceed public and get listed in the stock exchanges.
In short, The company which issues its shares is known as the issuer and the method of issuing shares to the public is called a Public issue or Initial Public Offer.
Any investor can buy shares of a company via the primary or secondary market.
The secondary market is where an investor can purchase shares of a company that are issued for the first time via the process of IPO.
An IPO is short for an Initial Public Offering.
Do you know many Types of IPO? and How IPO Allotment Works? – Here we would clarify that.
Why Do Companies Decide to Launch IPOs?
Let’s understand with an example,
A small start-up will have few or small investors or families investing in them.
These types of investors are normally called Angel Investors and they invest without hoping for that much of a return.
However, for startups to compete with large-scale’s companies, always need more capital. This is the key reason, private businesses decide to launch an IPO.
Raising capital always helps the company grow, innovate and take risks as IPOs can provide them with a financial cushion.
In short, IPOs are basically used by smaller, younger companies seeking capital to expand.
Here are some more key facts about the same.
- IPO is a better option than to take a debt.
- Early exit for the investors.
- Employee stock option.
- Clinch to a little awareness.
- Diversify ownership.
How IPO Listing Price is Decided?
The key factors which affect the issue price may be:
- Current Valuation of the company.
- Future growth prospects and expected earnings.
- Market valuation of peers listed on the stock exchange
- Market share in the industry
- Technology, innovation, competitiveness among the peers.
After the above analysis, companies can decide the issue price.
Thereafter, there are 2 types by which price offers can be made to investors.
Let’s have a look at IPOs Definition in terms of the Types.
Types of IPOs
There are two types of Public Issues.
Book Building IPO
The Book Building IPO is a new process in India as compared to developed nations.
In this process, wherein underwriters attempt to find out the price at which the IPO will be offered.
Used for efficient price discovery, This process is a mechanism,
wherein during the period for which the IPO is open bids are collected from investors at many prices.
The offer price of the IPO is determined after the ending date of the bid.
Fixed Price IPO
In Fixed Price IPO, the organization going for IPO determines the price at which its shares will be offered to investors.
In this type of IPO, investors know the price of the share before it goes public.
Investors need to pay the full price of the share while making an application.
IPOs Definition: Fixed Price vs Book Building
- Offer Price
The price is fixed on the first day of issue & Investor need to pay the full price of the share.
The exact price is not fixed.
The final price is determined by the issuer only after closure of the bidding.
Demand offered is known only after the closure of the issue.
This is available on a real time basis on the BSE website during the bidding period.
100 percentage advance payment is needed to be made by the investors at the time of application.
10 percentage advance payment is required to be made by the qualified institutional buyers(QIBs) along with the application,
while other categories of investors have to pay 100 percentage advance along with the application.
50 percentage of the shares offered are reserved for applications below Rs 1L and the balance for higher amount applications.
50 percentage of shares offered are reserved for QIBs, 35 percentage for small investors and the balance for all other investors.
Where Do companies launch?
Let’s discuss IPOs Definition in terms of the market.
When a company decides to go public for the first time through raising an IPO, it is done in the primary market.
As the securities are sold for the first time here, a primary market is also called the New Issue Market.
The company sells its shares directly to the investors in the New Issue Market (NIM).
The entire procedure of raising investment capital by selling new stock to investors by an IPO is called underwriting.
Once the shares are sold, they are bought and sold by traders in the secondary market, also called as After Issue Market (AIM).
IPOs Definition: Primary vs Secondary Market
|also Know as||New Issue Market (NIM)||After Issue Market (AIM)|
|Transaction between||The issuer of security and buyer.||Holder of security and buyer.|
|Sale||To raise funds for the company entity.||To earn a profit for the holder of the security.|
|Price||Fixed.||Changes depend on supply and demand.|
How IPO Allotment Works?
IPO’s allotment method is a way by which investors are issued the shares of the company whose IPO they subscribed to. However, this allotment process follows the rules set by the SEBI (Securities and Exchange Board of India).
As per the SEBI guidelines, the allotment to each retail individual bidder shall not be less than the minimum bid lot.
It depends on the availability of shares in the retail individual portion and remaining available shares, if any, shall be allotted on a proportionate basis.
As per SEBI rules, an individual cannot bid for shares less than the lot size. However, When retail investors bid for shares in an IPO, they bid in lots and not shares.
Let’s check the IPOs Definition in terms of the investors.
IPO Investors Types
There are 4 types of investors who can bid for shares during the IPO process.
1. Retail Individual Investor (RII):
Investors can not bid for more than Rs 2L.
Retail Individual investors have an allocation of 35 percentages of shares of the total issue size in Book Build IPO’s.
2. High Networth Individual (HNI):
Individuals seeing to invest more than Rs 2 lakh are categorized as HNIs.
3. Non-institutional bidders:
Individual investors, NRIs, companies, trusts, etc. who applied for more than Rs 2L are called non-institutional bidders. They need not register with the Securities and Exchange Board of India.
NIBs have an allocation of 15 percentages of shares of the total issue size in Book Build IPO’s.
4. Qualified Institutional Bidders (QIBs):
Financial Institutions, Banks, FIIs, and Mutual Funds who are registered with SEBI are called as QIBs. They usually bid in very high quantities.
Eligibility Criteria for IPO
- Maintains a Savings Bank or Current Account.
- Has a Demat account with any DP along with a valid PAN (Permanent Account Number).
- Has a sufficiently clear credit balance in his/her Savings or Current account.
Bottom line of IPOs Definition
In conclusion, Purchasing any IPO stocks needs a lot of homework, and they can be risky.
it must be remembered that it’s not always compulsory that every IPO will perform well.
Therefore, most people should consider new organizations carefully, and it’s wise to limit your position size on any individual stock to a few percent of your holdings.
Source – NSE India & BSE India