Why do companies go public?
Main reason to file for an IPO (Initial Public Offer), is to raise funds to fuel their Capital Expenditure
Advantages by taking his company public
- Raising funds to meet Capital Expenditure requirement,
- Avoiding the need to raise debt, so that company don’t need to pay finance charges, which translates better profitability.
- Promoter can spread their risk among large group of people,
- Provide an exit to early Investors-They have an opportunity to sell their shares in open market,
- Giving an opportunity to employees of company, to sell their shares which is allotted through ESOP (Employ Stock Option Plan),
- Improve visibility of the company publicly.
Steps Involve in IPO Issue
The first step is to appoint a Merchant Banker. Merchant Banker also called as Book Running Lead Manager (BRLM)/ Lead Manager (LM). Merchant Banker has assisted to the company for the following aspects of IPO process,
- Ensure legal compliance and issue due diligence certificate,
- Help to prepare listing documents including DRHP (Draft Red Herring Prospectus)
- Act as Underwriters of the share-agree to buy all or part of the IPO Issue and sell the same in the public
- Help to arrive Price Band for IPO. Price Band is Lower and Upper Limit of share price within which company go for public
- Appointment of other intermediaries namely, registrars, bankers, advertising agencies etc.
IPO Events
IPO sequences happen under SEBI regulations. In general, the following steps involved.
Appoint a merchant banker – Can appoint more than 1 Merchant Banker in case of large public Issue,
Apply to SEBI with a registration statement – Contains why the company plans to go public and the financial health of the company,
Getting a nod from SEBI – Once SEBI receives the registration statement; SEBI takes a call on whether to issue a go ahead or a ‘no go’ to the IPO
DRHP – Once the company gets initial SEBI nod, company has to prepare the DRHP. It circulated to public, along with a lot of information,
Market the IPO – Involves Advertisement,
Fix Price Band,
Book Building,
Closure – IPO generally open for few days
Listing Day – Get listed on Stock Exchange.
What is DRHP?
- The estimated size of the IPO,
- The estimated number of shares being offered to public,
- Why the company wants to go public and how does the company plan to utilize the funds,
- Business description including the revenue model, expenditure details
- Complete financial statements,
- Management Discussion and Analysis,
- Risks involved in the business,
- Management details and their background.
After IPO:
During the bidding process (also called the date of issue) investors can bid for shares at a particular price within the specified price band. This whole system around the date of issue where one bids for shares is referred to as the Primary Market. The moment the stock gets listed on the stock exchange; the stock starts to trade publicly. This is called the secondary markets. the stock gets traded daily on the stock exchange. People start buying and selling the stocks regularly.
Important Jargons of IPO:
Under Subscription
- Bids received less than the Public Offer
Over subscription
- If there are 200,000 bids for 100,000 shares on offer then the issue is said to be oversubscribed 2 times (2x)
Green Shoe Option
- Part of the underwriting agreement which allows the issuer to authorize additional shares (typically 15 percent) to be distributed in the event of over subscription. This is also called the overallotment option.
Price Band and Cut off price
- Price band is a price range between which the stock gets listed. For example, if the price band is between Rs.100 and Rs.130, then the issue can list within the range. Let’s says it gets listed at 125, then 125 is called the cut off price.