Initial Public Offering (IPO) can be defined as the process in which a private company or corporation can become public by selling a portion of its stake to the investors.
Companies can raise equity capital with the help of an IPO by issuing new shares to the public or the existing shareholders can sell their shares to the public without raising any fresh capital.
Companies must meet requirements by exchanges and the Securities and Exchange Commission (SEC) to hold an initial public offering (IPO). Once the IPO is done, the shares of the firm are listed and can be traded freely in the open market.
ELIGIBILITY CRITERIA FOR IPO
The following are the eligibility norms for companies planning to file an IPO as stipulated by SEBI :-
- Net Worth of Company should be Rs 3 Crore in the previous full 3 years.
- The Company must have tangible assets of Rs 3 crores in the previous three years in which not more than 50% in monetary asset .
- At Least 15 crore average profit before tax for the previous 3 years out of 5 years
- The size of the IPO can’t exceed the company’s worth by more than five times.
TYPES OF IPO
There are two common types of Initial Public Offerings :-
- FIXED PRICE OFFERING – Fixed Price IPO can be referred to as the issue price that some companies set for the initial sale of their shares. The investors come to know about the price of the stocks that the company decides to make public. If the investors partake in this IPO, they must ensure that they pay the full price of the shares when making the application.
- BOOK BUILDING OFFERING – In the case of book building, the company initiating an IPO offers a 20% price band on the stocks to the investors. The interested investors bid on the shares before the final price is decided. Here, the investors need to specify the number of shares they intend to buy and the amount they are willing to pay per share.
INITIAL PUBLIC OFFERING PROCESS-
Below are the steps a company must undertake to go public via an IPO process:
- The first step in the IPO process is for the issuing company to choose an investment bank to advise the company on its IPO and to provide underwriting services.
- The banks try to sell the shares of the company. They work out the capital the company would raise, the price to be fixed for one share and the number of shares to be put on offer. Then, the underwriters and the company work together to draft an application to SEBI (Securities and Exchange Board of India) for approval.
- After thorough scrutiny, SEBI approves the application for filing an IPO.
- An initial prospectus, which contains the probable price estimate per share and other details regarding the IPO, is shared with the people who are involved with the IPO. It is called a Red Herring prospectus.
- After submitting the prospectus to SEBI, Companies do marketing and advertising of the IPO with the help of marketing agencies. It is Called the Road Show.
- Finally, the IPO opens, bidding takes place, shares are allotted and the IPO is closed.
ADVANTAGES OF IPO-
- It reduces the cost of capital because interest is not paid in case of publically raised money.
- It enables a company to raise large amount of funds which can be used for making further investments.
- By getting listed on a stock exchange business receives wide media coverage enhancing company’s visibility and recognition of its products and services.
Thus, in simple words IPO refers to the shares of stock issued by a company to the public for the first time to raise capital and to enrich prior investors.