- What is share market?
- Everything about sensex & nifty- what are stock market indices?
- 23 must know terms for investors in stock market
- Stock market participants & financial intermediaries
- What is market capitalization?
- What are initial public offerings?
- What are the stock market timings in India?
- What is a ‘BULL’ & ‘BEAR’ market?
- Why do stock prices fluctuate?
What are initial public offerings?
The company hires an investment bank to handle the entire process of an IPO. The investment bank and the company decide the amount of funds to be raised, type of securities to be issued and other necessary details.
Investment bank applies to SEBI with its registration statement. The statement contains details about the company’s management, financial statements, where the money raised from IPO will be used, any legal problem the company is in, etc. SEBI then investigates all details and makes sure all necessary information is disclosed. Once SEBI approves the statement, a date is decided when the stock will be offered to the public.
Investment bank prepares a Red herring prospectus which contains all details of the company. Management of the company, their future plans, financial statements and size of the IPO are also mentioned in the Red herring prospectus, which is then marketed on all newspapers, television channels to investors so that they purchase the IPO. This prospectus is also called Offer document.
The next step is fixing a price for the IPO at which investors will invest their money. Investment bank will fix a price band, for e.g. 950-1000 and investors will bid in this range, where 950 is called the floor price and 1000 is the cap price. Investors can bid for a period of around 3-7 days. This entire process is called book building. The shares are then allotted to the successful bidders and remaining bidders get the refund. Note that while investing in IPO’s you need to invest in lots. Say if you bid at a price of 1000, company will fix the lot size at 14, so you need to buy 14 shares and pay 14,000 Rs, if you want to buy 2 lots you have to pay 28,000 Rs
As investors bid at various prices, the company will fix one price around which most investors have done bidding and the company is listed at the place on the stock exchange and then starts trading.
Qualified institutional buyers (QBI’s):
These included all the mutual fund companies, pension funds, provident funds, insurance companies etc. These set of investors have a huge capital to invest. There is a specific quota reserved for all investors in IPO’s and QBI’s are allotted maximum quota of 50%
Non-institutional investors or high net worth individuals (HNI):
They include individual investors, NRI etc. When you bid for an amount of more than 2 Lakh Rs in an IPO you are included in this category. The quota reserved for this category is 15%.
Retail investors are the common investors who bid only up to an amount of 2 Lakh Rs. The quota reserve for this category is 35%.
Common terminologies used in IPO
Book building process:
An IPO is undersubscribed if investors have bid less shares than offered by company.