Initial Public Offer

Initial public offer (initial offering) as the name suggests refers to when a company goes public or issue sh ars of the company to the public in order to raise capital for the offset time. After the IPO, the company run lows listed and its sh bes are traded on stock exchange. Once it gets listed accordingly the permission to trade these shares is tending(p) by shareholders i. e. to whom the shares have been exclusivelyotted in the IPO. There mass be many reasons for bringing out an IPO. First, when the company issues new shares to the public, then the currency raised from public goes to the company.Second, when the Govt. Sell their stake in the company to the public, then the money raised goes to the Govt. (like the disinvestment of PSUs). However, one must be wondering why would individuals invest in a particular company? The answer is dividends. The shareholders accept the company bequeath distribute the share of future profits among them as dividends. How an IPO is con ducted IPOs generally involve book runners i. e. one or much investment banks known as underwriters. The underwriters retain a portion of the harvest-home as their fee. This fee is called an underwriting spread.Various methods of conducting an IPO are Dutch auction, starchy Commitment, Best Efforts, Bought Deal and Self Distribution of stock. IPOs can be make by means of the Fixed Price Method or Book construction Method. In the mulish toll method, the outlay at which the securities are offered is fixed in advance. In the book building method, the investors have to bid for shares indoors a legal injury spate specified by the issuer and the final price is decided after observing the result of the bid. The fixing of the band and the bidding process are done with the help of an investment bank or a group of several companies specializing in securities.While most of the companies are eligible to make a public issue are allay to decide the price band but infrastructure compan ies are field of honor to follow SEBI norms as well as banks are required to get RBIs permission. The prices are decided by the companys board of directors, which fixes the band after consulting the book runner (particularly an investment bank). In India, the issuer is allowed a price band of 20% (that is the cap of band should not be more(prenominal) than 20% above the floor price i. e. the lowest price that a seller will accept). After deciding the band, bids are invited on all prices of the band.Once the book is closed, the seller fixes the price at which all of its shares will get sold. However, there can be a situation of Oversubscription of an IPO (i. e. if applications are received for more number of shares than the company is authorised to allot). In that case, the allocations would be done proportionately among all the successful bidders i. e. among those bidders who did bidding at the price determined by the company or at the price higher than that. After the price has b een determined on the basis of bidding, the public advertisement containing the rice as well as table show the number of securities and the amount payable by an investor is issued. Various Investors Involved ? ? ? sell Investors Non-Institutional Investors Qualified Institutional Buyers If a company is making an issue through 100 % book building process then1) Minimum 35% shall be offered to Retail Investors 2) Minimum 15% shall be offered to Non-Institutional Investors 3) Maximum 50% shall be offered to Qualified Institutional Buyers. There can also be FPO (Follow on public offer) when companys offer to the public is not for the first time. There are certain advantages attached with going public.Capital can be used to pay off existing debt or to lineage capital expenditure. Moreover, another advantage is an increased public awareness of a particular company as IPOs helps in attracting new potential customers which whitethorn ultimately leads to increase in the market share of a company. forward deciding whether to go public or not, a company must evaluate all the potential benefits or challenges that will arise. The book runners involved in the process (i. e. investment banks) are given the responsibility to maintain out the pros and cons of an IPO and determine whether it is favourable or not for the company.