In the previous blog post, we discussed that Initial Public Offerings (IPOs) are an integral part of the financial world, providing companies with an opportunity to go public and raise funds from the capital markets. This post will delve into the IPO process, shed light on why companies choose to go public, and explore key terms associated with IPOs.
Why companies Go Public
There are several reasons why companies decide to file for an IPO. Firstly, going public allows companies to raise funds for capital expenditure (CAPEX) without relying heavily on debt. By accessing the capital markets, companies can secure the necessary funds to support their growth and expansion plans.
Secondly, an IPO provides an exit opportunity for early investors, including promoters, angel investors, and venture capitalists. Going public allows them to sell their shares in the open market and realize their investments. Additionally, companies can reward their employees through Employee Stock Options (ESOPS), which provide an opportunity for employees to benefit from the company's success.
Moreover, going public enhances a company's visibility. As a publicly traded company, it attracts attention from the public, investors, and potential partners, which can contribute to its growth and success.
The role of Merchant Bankers
One of the crucial steps in the IPO process is the appointment of a merchant banker, also known as a Book Running Lead Manager (BRLM) or Lead Manager (LM). Merchant bankers play a vital role in assisting the company throughout the IPO process.
Their responsibilities include conducting due diligence, ensuring legal compliance, and issuing a due diligence certificate. They work closely with the company to prepare the listing documents, such as the Draft Red Herring Prospectus (DRHP), which provides comprehensive information about the company.
Merchant bankers also play a crucial role in underwriting shares and helping the company determine the price band for the IPO. They facilitate roadshows to promote the offering and appoint other intermediaries, such as registrars, bankers, and advertising agencies.
The IPO process
The IPO process follows a series of steps guided by regulatory guidelines. Here is a general sequence of events:
1. Appoint a merchant banker to assist with the IPO process.
2. Submit IPO application to the market regulator, and obtain regulatory approval for the IPO.
3. Prepare the Draft Red Herring Prospectus (DRHP) containing essential information about the IPO.
4. Conduct marketing activities to create awareness about the IPO.
5. Determine the price band within which the shares will be offered to the public.
6. Open the Book Building process for individuals to bid for shares at their preferred prices.
7. Determine the listing price based on the bids received, and debut on the stock exchange and commence trading.
Life after the IPO
Once the IPO is completed, the stock transitions from the primary market to the secondary market, where it is publicly traded on the stock exchange. In the secondary market, investors can buy and sell the listed shares regularly, and the stock price fluctuates based on various factors.
Key IPO terms
To navigate the IPO landscape effectively, it's essential to understand some key terms:
1. Over-subscription: When the number of shares subscribed for exceeds the number of shares offered.
2. Under-subscription: When the number of shares subscribed for during the IPO is less than the number of shares offered.
3. Green Shoe Option: A provision that allows the issuer to authorize additional shares in the event of oversubscription.
4. Price Band and Cut-off Price: The price range within which the stock gets listed, and the final price at which the issue gets listed.
5. Fixed Price IPO: An IPO where the price is fixed without a price band.
Conclusion
Understanding the IPO process and key terms is essential for anyone considering investing in IPOs. The last two blog posts have provided an overview of the IPO process, explained why companies choose to go public, and highlighted key terms associated with IPOs. By gaining knowledge in this area, investors can make informed decisions and explore exciting investment opportunities in the IPO market.
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Disclaimer: All investments are subject to market risk. The statements made in this article are for educational purposes only and should not be considered financial advice or an investment recommendation.
