With the current rainfall of IPOs by the companies in the Indian markets during current month or rather from last quarter, it will not be wrong to say that the with the onset of monsoon season in India there has been an onset of IPOs season for India. Hence, With this current trend, it is very imperative to get knowledge about how the whole mechanism of Inital Public Offering i.e. IPO functions in our country.
What is an Inital Public Offering (IPO)?
When an unlisted company makes either a fresh issue of shares or convertible securities or offers its existing shares or convertible securities for sale or both for the first time to the public, it is called an IPO. This paves way for listing and trading of the issuer’s shares or convertible securities on the Stock Exchanges.
What are the financial requirements for a company to issue an IPO?
SEBI has stipulated the eligibility norms for companies planning an IPO which are as follows:
Entry Norm I (Profitability Route)
- Net tangible assets of at least Rs.3crore in each of the preceding three full years of which not more than 50% are held in monetary assets. However, the limit of 50% on monetary assets shall not be applicable in case the public offer is made entirely through offer for sale.
- Minimum of Rs.15crore as average pre-tax operating profit in at least three years of the immediately preceding five years.
- Net worth of at least Rs.1crore in each of the preceding three full years.
- If there has been a change in the company’s name, at least 50% of the revenue for preceding one year should be from the new activity denoted by the new name
- The issue size should not exceed 5 times the pre-issue net worth
To provide sufficient flexibility and also to ensure that genuine companies are not limited from fund raising on account of strict parameters, SEBI has provided the alternative route to the companies not satisfying any of the above conditions, for accessing the primary market, as under:
Entry Norm II (QIB Route)
Issue shall be through book building route, with at least 75% of net offer to the public to be mandatory allotted to the Qualified Institutional Buyers (QIBs). The company shall refund the subscription money if the minimum subscription of QIBs is not attained.
Different Types of IPOs
- Book Building:- Compared to the developed countries, the concept of book building is new to India. In the book building issue, the price is discovered during the process of IPO. There is no fixed price, but there is a price band. The lowest price in the band is referred to as the ‘floor price’ and the highest price is referred to as the ‘cap price’. The price band is printed in the order document. And the investors can bid for the desired quantity of shares with the price which they would like to pay. Depending on the bids, the share price is decided. The securities are offered above or equal to the floor price. The demand is known everyday as the book is built
- Fixed Price offer:- In the fixed price IPO process, the Company along with their underwriters evaluate the companies’ assets, liabilities, and every financial aspect. Then they work with these figures to fix a price per issue to achieve the target funds. This price, which is fixed per issue, is printed in the order document. The order document justifies the price with qualitative and quantitative factors. The demand for securities is known only after the issue is closed. The oversubscription levels are high in the fixed price offerings, sometimes several hundred times.
What happens during the Process of IPO?
- The company should file for an IPO with SEBI by submitting all the required documents and information, consisting of the number of shares being issued, the set price, track record of the company, and the plans to utilize the capital being raised through IPO.
- Once the company receives the regulatory nod, it issues a red herring prospect, containing all the information regarding the IPO and its records.
- The company approaches a broking firm or investment banker to manage its IPO. This entity is referred to as the lead manager.
- The lead manager would then invite bids for the IPO from various investors. Here, investors can be both financial investors or retail investors.
- When the IPO is LIVE, the general public can subscribe to it and receive its shares corresponding to their investment if shares got allotted to them.
Generally, the IPO of a company would be open for subscription for three days to 21 days.
What happens Post IPO?
Once the IPO closes, all bids (applications) are registered and checked online. The incorrectly submitted ones are removed or disqualified (reasons being incorrect details, wrong PAN, etc). In case the total number of qualified applications is less than or equal to the number of shares offered in the IPO, complete allotment of shares takes place, resulting in every applicant getting assigned their shares.
If the bids are much higher than the total number of shares being issued, the lucky-draw system is used to allot shares. Only those bids that were at the upper band of the price band are valid. The remaining bids are rejected, and the money is returned to the investors.
How to invest in an IPO?
- The applicant must have the following:
- Demat account
- Trading account
- Mobile number linked to the bank account
- UPI ID
- The application shall be made with the stock broker manually or on its website by selecting the IPO for which application is to be made and specifying the number of shares and bidding price for the shares along with the UPI details for the payment.
- Once the application is submitted the mandate request is sent on the UPI application for the approval. The applicant must log into the UPI application and accept the mandate request. Once it is accepted, the amount of IPO will be blocked in the bank account of the applicant.
- Upon allotment, if no shares are allotted, the entire blocked amount is unblocked. If there is part allotment, the requisite amount is debited from the bank account and remaining amount is unblocked. The entire amount will be debited if the applicant is allotted all the shares that were applied for.