IPO Frequently Asked Question(s) provide answers to commonly asked questions about IPO's in Indian Stock Market. This IPO FAQ Category helps IPO investors for their better understanding of IPO's and to resolve their quires.
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1. What is an IPO?
IPO or Initial Public Offer is a way for a company to raise money from investors for its future projects and get listed to Stock Exchange. Or An Initial Public Offer (IPO) is the selling of securities to the public in the primary stock market.
Company raising money through IPO is also called as company ‘going public'.
From an investor point of view, IPO gives a chance to buy shares of a company, directly from the company at the price of their choice (In book build IPO's). Many a times there is a big difference between the price at which companies decides for its shares and the price on which investor are willing to buy share and that gives a good listing gain for shares allocated to the investor in IPO.
From a company prospective, IPO help them to identify their real value which is decided by millions of investor once their shares are listed in stock exchanges. IPO's also provide funds for their future growth or for paying their previous borrowings.
2. Who decides the Price Band?
Company with help of lead managers (merchant bankers or syndicate members) decides the price or price band of an IPO.
SEBI, the regulatory authority in India or Stock Exchanges do not play any role in fixing the price of a public issue. SEBI just validate the content of the IPO prospectus.
Companies and lead managers does lots of market research and road shows before they decide the appropriate price for the IPO. Companies carry a high risk of IPO failure if they ask for higher premium. Many a time investors do not like the company or the issue price and doesn't apply for it, resulting unsubscribe or undersubscribed issue. In this case companies' either revises the issue price or suspends the IPO.
3. Who decides the date of the issue?
Once ‘Draft Prospectus' of an IPO is cleared by SEBI and approved by Stock Exchanges then it's up to company going public to finalize the date and duration of an IPO. Company consult with the Lead Managers, Registrar of the issue and Stock Exchanges before decides the date.
4. What is the role of registrar of an IPO?
Registrar of a public issue is a prime body in processing IPO's. They are independent financial institution registered with SEBI and stock exchanges. They are appointed by the company going public.
Responsibility of a registrar for an IPO is mainly involves processing of IPO applications, allocate shares to applicants based on SEBI guidelines, process refunds through ECS or cheque and transfer allocated shares to investors Demat accounts.
5. What is the role of Lead Managers in an IPO?
Lead managers are independent financial institution appointed by the company going public. Companies appoint more then one lead manager to manage big IPO's. They are known as Book Running Lead Manager and Co Book Running Lead Managers.
Their main responsibilities are to initiate the IPO processing, help company in road shows, creating draft offer document and get it approve by SEBI and stock exchanges and helping company to list shares at stock market.
6. What is Follow on public offering or FPO?
Follow on public offering (FPO) is public issue of shares for already listed company.
7. What is primary & secondary market?
Primary market is the market where shares are offered to investors by the issuer company to raise their capital.
Secondary market is the market where stocks are traded after they are initially offered to the investor in primary market (IPO's etc.) and get listed to stock exchange. Secondary market comprises of equity markets and the debt markets.
Secondary market is a platform to trade listed equities, while Primary market is the way for companies to enter in to secondary market.
8. What is the life cycle of an IPO prospectus?
Stage 1: Draft Offer document
"Draft Offer document" is prepared by Issuer Company and the Book Building Lead Manager of the public issue. This document is submitted to SEBI for review. After reviewing this document either SEBI ask lead managers to make changes to it or approve it to go ahead with IPO processing.
Draft document are available on SEBI's website in the section of ‘Reports -> Public Issues: Draft Offer Documents filed with SEBI" at: http://www.sebi.gov.in/SectIndex.jsp?sub_sec_id=70
"Draft Offer document" is usually a PDF file having information of an investor who needs to know about the public issue. It mainly contain information about the company, its business, management, risk involve in applying to this issue, company financials and the reason why company is raising money through IPO.
Stage 2: Offer Document
Once the ‘Draft Offer document' cleared by SEBI, it becomes "Offer Document". Offer Document is the modified version of ‘Draft Offer document' with SEBI suggestions.
"Offer Document" is submitted to the registrar of the issue and stock exchanges where Issuer Company is willing to list.
Stage 3: Red Herring Prospectus
Once "Offer Document" gets clearance from Stock Exchanges, Issuer Company add Issue size and price of the issue to the document and make it available to the public. The issue prospectus is now called "Red Herring Prospectus".
Red Herring Prospectus also can be found on SEBI website at:
9. What is the life cycle of an IPO?
Below is the detail process flow of a 100% Book Building Initial Public Offer IPO. This process flow is just for easy understanding for retail IPO investors. The steps provided below are most general steps involve in the life cycle of an IPO. Real processing steps are more complicated and may be different. Please visit SEBI website, stock exchange website or consult an expert for most current information about IPO life cycle in Indian Stock market.
- Issuer Company - IPO Process Initialization
- Appoint lead manager as book runner.
- Appoint registrar of the issue.
- Appoint syndicate members.
- Lead Manager's - Pre Issue Role - Part 1
- Prepare draft offer prospectus document for IPO.
- File draft offer prospectus with SEBI.
- Road shows for the IPO.
- SEBI – Prospectus Review
- SEBI review draft offer prospectus.
- Revert it back to Lead Manager if need clarification or changes (Step 2).
- SEBI approve the draft offer prospectus, the draft offer prospectus is now become Offer Prospectus.
- Lead Manager - Pre Issue Role - Part 2
- Submit the Offer Prospectus to Stock Exchanges, registrar of the issue and get it approved.
- Decide the issue date & issue price band with the help of Issuer Company.
- Modify Offer Prospectus with date and price band. Document is now called Red Herring Prospectus.
- Red Herring Prospectus & IPO Application Forms are printed and posted to syndicate members; through which they are distributed to investors.
- Investor – Bidding for the public issue
- Public Issue Open for investors bidding.
- Investors fill the application forms and place orders to the syndicate members (syndicate member list is published on the application form).
- Syndicate members provide the bidding information to BSE/NSE electronically and bidding status gets updated on BSE/NSE websites.
- Syndicate members send all the physically filled forms and cheques to the registrar of the issue.
- Investor can revise the bidding by filling a form and submitting it to Syndicate member.
- Syndicate members keep updating stock exchange with the latest data.
- Public Issue Closes for investors bidding.
- Lead Manager – Price Fixing
- Based on the bids received, lead managers evaluate the final issue price.
- Lead managers update the 'Red Herring Prospectus' with the final issue price and send it to SEBI and Stock Exchanges.
- Registrar - Processing IPO Applications
- Registrar receives all application forms & cheques from Syndicate members.
- They feed applicant data & additional bidding information on computer systems.
- Send the cheques for clearance.
- Find all bogus application.
- Finalize the pattern for share allotment based on all valid bid received.
- Prepare 'Basis of Allotment'.
- Transfer shares in the demat account of investors.
- Refund the remaining money though ECS or Cheques.
- Lead manager – Stock Listing
- Once all allocated shares are transferred in investors dp accounts, Lead Manager with the help of Stock Exchange decides Issue Listing Date.
- Finally share of the issuer company gets listed in Stock Market.
10. What is the difference between Book Building Issue and Fixed Price Issue?
Initial Public Offering can be made through the fixed price method, book building method or a combination of both.
Difference between shares offered through book building and offer of shares through normal public issue (Source: BSE):
Fixed Price process
Book Building process
| Pricing||Price at which the securities are offered/allotted is known in advance to the investor.||Price at which securities will be offered/allotted is not known in advance to the investor. Only an indicative price range is known.|
| Demand||Demand for the securities offered is known only after the closure of the issue.||Demand for the securities offered can be known everyday as the book is built.|
| Payment||Payment if made at the time of subscription wherein refund is given after allocation.||Payment only after allocation|