Initial Public Offering (IPO) is a process in which a Private company sells its share to the public for the first time. After Becoming a Public limited company the share of a company can trade on Different Stock Exchanges. Thus IPO is the process to become a Public Company from a Private Company. When you think of an IPO the first thing that comes to mind is getting your hand on the Abridged prospectus i.e the prospectus of an IPO.
The process of IPO begins when the companies decide to go to an investment bank where they go through underwriting which is when investment bankers raise capital on behalf of corporations. The investment bank does the documentation and prepares the registration agreement. Following which, the underwriter then releases an initial prospectus leading to the negotiations between the company and the underwriter. Finally, the investment bank starts selling the stock on the stock market. The aforementioned process is simply a glimpse of what the process seems like, there are various phases and documents that are released including the hype created by the companies to make their IPOs go oversubscribed.
Why does any startup opt for launching IPOs?
There comes a stage in every company where they would want to expand and with those expansions arrives the need for huge amounts of capital hence the companies go public so that the early investors can cash out their investments. An Initial Public Offer is considered one of the most unexceptional ways to raise money if you want to grow your venture.
It also gives the public part ownership of the company instilling a feeling of involvement within themselves. It leads to a better Public Image for the company and helps the startup reach many more people in turn helping their expansion strategies. It makes the company more transparent and hence gains the trust of many customers as well as the general public providing them enhanced credibility.
Key IPO terms
Categories Terms Price Price Band - The price range within which the investors can bid per share. Floor Price - the minimum bidding price per share while applying for an IPO. Issue Price - The price at which shares are allotted to the investors post the book- building process. Cut-off Price - lowest issue price at which shares are allotted in an IPO.DatesOffer Date - the date when you can apply for shares in an IPO. Listing date - the date when IPOs start trading on a stock exchange. Share Quantities Lot Size Minimum Subscription Investor Abridged prospectus - A condensed version of the prospectus of the IPO. Including all main salient features. Draft Red herring Prospectus (DRHP) - a document to be submitted before at least 21 days to the SEBI. Red herring prospectus - ROC (Registrar of Companies) final prospectus filed before the launch.Subscription Oversubscribed - when the public bid more for the shares than offered by the company.
Why the IPO rush?
In 2020-21, as many as 69 companies raised close to Rs 75,000 crore through public issues, including IPOs. The figure is expected to more than double in 2021-22 as the LIC alone is expected to mop up around Rs 70,000 crore from the market. The reason for the excessive rush in layman's terms is simple: the suspicion of the rise of the economy leads companies to make the entry pre hand so that it benefits them once they are already in the market. All the barriers that affected the market are vanishing. We can see a good earning season which in turn leads to liquidity in the market.
Demand and supply
IPOs are a game of demand supply. Nobody knows when Zomato (A food delivery startup who lists a number of restaurants
online and you can order through them) will start making profits but the traders with insight into the market know that it's a game of demand and supply. NBFC(Non- banking Financial company) and banks provided 99% margin finance to various institutions including several mutual funds and high net worth individuals.
The upcoming list of IPOs including BYJU's IPO Indicates a bull market. The large primary offerings suck the liquidity from the market leading the startups into the unicorn phase (a unicorn is a privately held startup company valued at over $1 billion). The term was first popularised in 2013 by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures. and providing more leverage to play with in the market.
Many companies have opted for IPOs since the end of 2020, primarily due to the impact of the Covid-19 pandemic on business and exuberant stock market activity. Analysts suggest that companies are going public due to the excellent performance seen in the stock markets and higher participation of first-time investors including high net worth individuals. A State Bank of India (SBI) report suggested that over 14.2 million new individual investors have participated in the stock markets in 2020-21.
Even as the pandemic continues to wreak havoc on India’s economy, the domestic stock market has not been affected at all. Stock market benchmark indices S&P BSE Sensex and Nifty50 are performing better than ever at the moment. Given the stellar market performance, a higher percentage of recent IPOs have done exceptionally well and more investors are looking to make the most of this period. The high retail investor interest coupled with liquidity has created a perfect platform for companies to go public.