Everything You Need To Know About IPO's

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 28, 2021

Introduction

The process by which a private company becomes a public company by selling its shares on the stock exchange is known as an initial public offering (IPO). It can also be defined as the process by which a private company becomes a publicly traded company.
From the perspective of an investor, an IPO allows them to purchase shares of a company directly from the company at a price of their choosing (in book build IPOs).

From the standpoint of a company, an IPO assists them in determining their true value, which is determined by

millions investors there are In the event of a successful IPO, it aids in increasing the company’s valuation.

IPOs also provide funds for future growth or repayment of previous debts.

Advantages of Going Public Using an IPO

Companies can raise capital from a large number of investors using crowdfunding.
The company can use the funds raised to expand its business further with the money raised.
If the company’s sales and profits increase as a result, the exposure, prestige and valuation of the company increase.
As a result, the company does not have to pay interest to its shareholders.

Disadvantages of Going Public Using an IPO

Initiating a public offering (IPO) is a complicated, time-consuming and expensive process.
It takes an average of 6-9 months or even longer to complete a project of this magnitude.
When a private company goes public, the company is required to disclose all significant information about the company in order to be listed on the stock exchange.
They can vote to override management decisions, or to get rid of managers and directors altogether, when they gain a significant ownership stake in a company
The risk of under-subscription is a reality for many companies.
As a result, all costs and expenses incurred would be lost if the issue was not subscribed to at least 90 percent.

IPO Application Requirements

An investor may apply only at the lower of the bid price and the cut-off price.
The investor must provide a PAN.
An investor should have an NSDL or CDSL Demat account.
The total bid amount for the IPO application will be frozen until the allotment is completed. The amount cannot be used by the investor during the locked period.

Some Important Phrases

Depository: A depository is similar to a bank. A depository stores investor securities (such as shares, debentures, bonds, Government Securities, units, and so on) in electronic form. A depository, in addition to holding securities, provides services related to securities transactions. In India, there are two major depositories: a) National Securities Depository Ltd. (NSDL) and b) Central Depository Securities Ltd. (CDSL), both of which are governed by SEBI.

Depository Participant: A Depository Participant is the registered agent of the depository in question, and it is through the DP that an investor obtains depository services. To use this service, you must first open a Depository Account with the DP. After obtaining the necessary approval from SEBI and complying with other statutory requirements, banks, financial institutions, and stock brokers act as Depository Participants. The Depository Participant handles all transactions on your DMAT account and assigns you an e-broking ID or client ID to identify your relationship with the DP.

DP ID: This is the Depository Participant ID associated with your demat account. It is an 8-character string that begins with ‘IN’. This is only applicable to NSDL.
Client Identification Number: This is the eight-digit number associated with your demat account. This is only applicable to NSDL.
DP a/c number of the beneficiary: It is the demat account number, which has 16 digits. This only applies to CDSL.

IPO Types

There are two types of IPOs:

Fixed Price Issue

Book Building Issue

A fixed price issue, a book building issue, or a combination of both can be used to make the initial price offer.

Fixed Price Issue

A fixed price issue occurs when a company goes public and sets a fixed price for its shares to be issued to investors. Before the company becomes public, investors are informed of the share price. This fixed price per issue price is included in the company’s prospectus, along with justifications for the price based on qualitative and quantitative variables. The market demand is only known when the issue is closed. When making an application for this sort of IPO, the investor must pay the whole share price. Companies rarely launch an initial public offering (IPO) with a set price.

Book Building Issue

The price of the book is discovered during the IPO procedure in the book building issue. There is no set pricing, but there is a range of prices. The ‘floor price’ refers to the lowest price in the band, while the ‘cap price’ refers to the highest price. Investors will be offered a 20% price band on shares when the company goes public. After the bidding has closed, investors bid on the shares, and the ultimate price is determined. Investors must select the number of shares they wish to purchase as well as their price range. In today’s world, firms use this procedure to create an initial public offering (IPO).

Investor Types for an IPO

These are the four types of investors who can participate in an IPO:

Qualified Institutional Buyers (QIB)

QIBs are financial institutions, banks, FIIs, and mutual funds that are registered with SEBI.

They typically apply in large quantities.

Non-Institutional Investors (NII)

Individual investors, NRIs, companies, trusts, and other entities that bid more than Rs. 2 lakhs are referred to as non-institutional bidders.

They are not required to register with SEBI in the same way that RIIs are.

Non-institutional bidders are allocated 15% of the total issue size in Book Build IPOs.

Retail Individual Investors (RII)

Retail individual investors are those who are unable to apply for a loan in excess of Rs 200000.

In Book Build IPOs, retail individual investors have been allocated 35% of the total issue size.

NRIs who apply for the IPO with a purchase price of up to Rs 200000 are also considered Retail Individual investors.

High Net worth Individual or investors (HNI)

If an individual applies to an IPO for a sum greater than Rs 2,00,000, the individual is classified as a High Net Worth Individual (HNI).

Refunds of IPOs

IPO Refunds are given to investors by merchant bankers to IPO applicants.

Electronic Clearing Services (ECS) in India are used to make these IPO refunds.

The Reserve Bank of India, India’s apex bank, controls the clearing houses that are also involved in the IPO refund process.

These IPO refunds are also made via direct credit and real-time gross settlement (RTGS), depending on the applicant’s eligibility criteria.

The relevant details of the IPO applicant’s bank account are obtained from depositories for applications submitted entirely in dematerialized form.

IPO Application Withdrawal/Modification

Applicants in book-built issues (except QIBs) have until the issue closure date to revise or withdraw their bids.

ASBA bids can be withdrawn as well.

During the bidding period, you can approach the same bank to which you submitted the ASBA and request a withdrawal in writing, citing your application number.

After the bid closure period, you may submit a withdrawal request to the Registrars, who will cancel your bid and instruct Self Certified Syndicate Banks (SCSB) to unblock the application money in your bank account after the basis of allotment is finalized.

Application Supported by Blocked Amount

ASBA is an acronym that stands for “Application Supported by Blocked Amount.”

ASBA is an application that contains an authorization to block money in the application’s bank account in exchange for subscribing to an IPO.

If an investor applies through ASBA, his or her application money will be debited from his or her bank account only if his or her application is selected for allotment after the basis of allotment is finalized, or the issue is withdrawn/failed.

The amount of the IPO application money is held until the allotment status is determined.

To apply via the ASBA facility

Investors submit the ASBA form (available at designated branches of banks acting as SCSB) to their banking branch with an instruction to block the amount in their account after filling out the details such as the applicant’s name, PAN number, Demat account number, bid quantity, bid price, and other relevant details.

In turn, the bank will post the application details on the bidding platform.

Investors must ensure that the information on the ASBA form is correct; otherwise, the form may be rejected.

Investors can now apply online through the bank’s website.

SEBI has established a list of investors who are eligible to apply through ASBA.

All investors can apply for public issues beginning May 1, 2010, through ASBA.

In rights issues, all shareholders of the company as of the record date may use ASBA to make applications, provided that he/she/it:

Is holding shares in dematerialized form and has applied for entitlements or additional shares in the issue in dematerialized form;

has not renounced its entitlements in whole or in part; is not renounced, and is applying through the blocking of funds in a bank account with the SCSB.

Reverse book building

In layman’s terms, reverse book building is the process by which companies delist their shares from the stock exchange through the buyback process.

When a company has excess cash on its balance sheet, or when the company wants to increase the promoters’ shareholding, or when a promoter wants to delist the shares from the stock exchange, it can buy back the shares from existing public shareholders using a Reverse Book Building process, subject to SEBI approval.

The following is the procedure for creating a reverse book building:

To place bids on the online electronic system, the promoter or acquirer must appoint a Merchant Banker as well as a trading member.
The Merchant Banker and Promoter must make a public announcement about the floor price and send a letter of offer and a bidding form to the public shareholders. The floor price would be determined by averaging the stock’s last 26 weeks / 6 months average closing price (assumed to be higher than the ruling / prevailing price in the stock market).
Shareholders can approach the trading member and use the bidding form to place bids/offers on the online electronic system. Shareholders have the option to bid at or above the floor price.
Prior to placing orders, shareholders who wish to take advantage of the exit opportunities must deposit their shares with the trading members. They could also make a pledge for the shares.
The final offer price is the price at which the maximum number of shares are offered.
The promoter must have the option to accept or reject the price.
If the price is accepted, the promoter is obligated to accept any and all valid offers up to and including the final price.
However, if the amount eligible for acquiring securities at the final price offered does not result in a promoter holding exceeding the limits specified in the Regulations, the offer is deemed to have failed and the company remains listed.
At the end of the offer, the merchant banker to the book building exercise must announce the final price and the promoter’s acceptance (or rejection) of the price. Any remaining public shareholders may deposit shares with the promoter at the same final price for a period of one year after the delisting date.

Follow on Public Offering (FPO)

A follow-On public offering (FPO) occurs when an already publicly traded company issues new securities to the public in order to diversify its equity base.

The company sells the shares through an offer document known as a prospectus.

A follow-on public offering can be of two types:

Dilutive offering: The company issues new shares in this type of offering.

The power of existing shareholders is diluted with the issuance of new shares.

Non-dilutive offering: When an offer is made by existing shareholders, the existing shareholders’ powers are not diluted.

Following-up public offers from existing shareholders frequently involve founders or other executives (such as venture capitalists) selling all or a portion of their stakes in a company.

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Everything You Need To Know About IPO's