Basic guide on Initial Public Offering (IPO) - Important Points you should know about IPO

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The main purpose of any investment is to earn profit.

This Article helps investors with all the basic information that they should know when investing in IPO. 

Many investors, especially the small investors, do not have expertise/ knowledge/ information to take investment decisions.

Investor: I want to invest in IPO
Problem: But I don't know the whole process of an IPO, that's why I am not able to invest. I have so many questions also like, how do we have to invest in this, how are the shares are allotted? What is book building issue and what is fixed price issue? What is the role of Investment Banker and Underwriter? 
Let's see answer to everything and clear our doubts:

Our main focus will be on:
  • The basic information that investors need to understand before investing
  • The factors that should be considered before investing
  • Detailed description of IPO
  • Process, Pricing and Benefits of IPO
  • Basis of shares allotment
  • Procedure of applying in IPO
  • Risks involved in IPO
  • Future Outlook and real-life IPO analysis
This will be helpful to the peoples who are interested to invest in IPO, but not able to invest due to lack of information and knowledge.

Content

  1. Introduction 
  2. What is IPO?
  3. Why do Companies go for IPO?
  4. What are the different types of Public Issue?
  5. What are the benefits of IPO?
  6. How do IPO works?
  7. What is the IPO procedure in India?
  8. What are the categories of investors in IPO?
  9. Who are the participants in an IPO?
  10. Is IPO grading mandatory? How does it help investors?
  11. How shares are allotted to Investors - Basis of Allotment?
  12. Does applying for IPO guarantee investors to receive the shares?
  13. For how many days an Issue is required to be kept open?
  14. When and how the investors get the allotment of shares?
  15. When and how the investors will get refund in case of non-allotment/ allocation?
  16. When will the shares allotted/ allocated to investors get listed?
  17. What is the cut-off system in the bidding process?
  18. How can investors increase their chances for allotment? How can investors increase their chances to receive the shares?
  19. What is ASBA
  20. What are the different ways of filing IPO application?
  21. Can I apply in IPO offline? If yes, How?
  22. What should Investors look into Red herring Prospectus (RHP)?
  23. What is IPO grey Market?
  24. What is Grey Market Premium & Kostak rates? How it helps investors?
  25. What are the factors considered for investing in new Issues?
  26. What are the risks and concerns involve in investing for an IPO?
  27. What are the risks and concerns of an IPO from company's perspective?
  28. Other Important Points for Investors


  1. Introduction 
    Economic Growth requires Capital Investment. 

    Primary Source for Capital Investment is Bank. However, with the Modernization of the Indian Economy and the Capital Constraints faced by the Banks, Corporates started to look for alternate source (IPO) for the capital investment. 

    IPOs allow Nation's fast-growing and most innovative companies to raise the capital they need to create jobs and grow.

    IPOs provide opportunities to investors to buy stakes in companies through applying in IPO with an objective to earn dividend and capital appreciation.


  2. What is IPO?
    Whenever a company wants to raise the money from the public, it can do so by selling its shares to the public and it has to get itself registered in the List of Stock Market, this is called IPO (Initial Public Offering). IPO is the process by which companies can go public by issuing new shares for the first time or existing shareholders sell part of their shareholding for the first time to the public.

    The company offering its shares is called the Issuer.

    IPO is offered to the public by the Issuer

    IPO subscribed by the public i.e., investors

    The Issuer will receive money from the investors for the first time in exchange of the shares.

    The Investors, in return, EXPECT a share in the company's future profits through dividends and Capital Growth through Stock Price Appreciation. 



  3. Why do Companies go for IPO?
    There are Five major funding stages as mentioned below:
    First Stage - Founders Funding Stage or Promoters Funds (Savings, family, Friends, Supporters). This is the period in which a company launch its operations.

    Second Stage - Angel Investors fills the gap between Promoters and Institutional Investors. This is the period in which a company has already validated its operations. In this period a company is at the Pre or Early revenue stage and the founders need to get the business off the ground.  

    Third Stage - Venture Capital (VC) Firms or Private Equity (PE) Firms are used by the companies that are already selling products or providing services, but they are not profitable. They usually have solid business model.

    Fourth Stage - IPO. Going for IPO is a strategic decision which provide Long Term solution to the capital requirement of the company. Further capital raised through IPO neither involve any interest charge nor has to be repaid.

     A company brings IPO for any or all of 3 main reasons as given below:

    1. Expansion

    2. Repayment of Debts or Loans taken in the past

    3. Exit to previous investors like Angel Investors, VC or PE wants to exit.  


  4. What are the different types of Public Issue?


    Public Issue: When a company raises funds by selling its equity shares to the public through Offer Document or Prospectus, it is called a Public Issue. 

    Types of Public Issue:
    IPO - Initial Public Offer - IPO is a type of issue where an unlisted company raises capital for the first time from the public by
    making fresh issue of securities or
    offering its existing securities for sale.

    FPO - Further/ Follow on Public Offer - FPO is a typo of issue where a Listed company raises additional capital from the public by
    making fresh issue of securities or
    offering its existing securities for sale.

    Offer For Sale (OFS) - Institutional Investors like VC, PE invest at the earliest stage of development in the company. Once the company grows bigger, these investors sell their shares to the public through the issue of offer document and subsequently shares gets listed on the stock exchange.
    OFS is also a special mechanism through which the promoters can sell their stake in the market.
    Only promoters or shareholders holding >10% of the share capital of the company can come up with such an issue. 
    Both retail and institutional investors can invest in OFS. 


  5. What are the benefits of IPO?




  6. How do IPO works?



  7. What is the IPO procedure in India?



  8. What are the categories of investors in IPO?



  9. Who are the participants in an IPO?



  10. Is IPO grading mandatory? How does it help investors?



  11. How shares are allotted to Investors - Basis of Allotment?



  12. Does applying for IPO guarantee investors to receive the shares?



  13. For how many days an Issue is required to be kept open?



  14. When and how the investors get the allotment of shares?



  15. When and how the investors will get refund in case of non-allotment/ allocation?



  16. When will the shares allotted/ allocated to investors get listed?



  17. What is the cut-off system in the bidding process?



  18. How can investors increase their chances for allotment? How can investors increase their chances to receive the shares?



  19. What is ASBA?



  20. What are the different ways of filing IPO application?



  21. Can I apply in IPO offline? If yes, how?



  22. What should Investors look into Red herring Prospectus (RHP)?



  23. What is IPO Grey Market?



  24. What is Grey Market Premium & Kostak rates? How it helps investors?



  25. What are the factors considered for investing in new Issues?



  26. What are the risks and concerns involve in investing for an IPO?



  27. What are the risks and concerns of an IPO from company's perspective?

    There are several risks and concerns of IPO to a company as shown in below pic:




  28. Other Important Points for Investors
    29. Know your risk bearing capacity
    Best time to invest in IPO
    Do not Borrow to invest in IPO



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