Published on Wednesday, August 15, 2018 by
IPO is the short form for the Initial Public Offering. It is a sale of shares by a company to the public for the first time. Without an IPO a company remains privately held company. The privately held company have a small number of shareholders. These shareholders may range from promoters, who are the owners of the company, their family members, friends, and relatives. Some strategic or professional investors may also hold the shares of a private company like venture capitalists, angel investors or private equity investors.
However, after the IPO process which informally is also known as going public, the number of shareholders increases multifold, when compared to the privately held company. IPO allows individuals like you and me and institutional investors to purchase and sell shares of the company. With this initial offering, a company's share becomes eligible for a stock exchange listing. Stock exchange listing facilitates in buying and selling of such shares of companies.
An IPO may also give exit options to the company owners and other initial investors by way of offer for sale. This helps them to profit from the early risk that they took in the form of the new venture.
Analyzing a well-established listed company from an investment point of view is a tough job. It became more tough and trickier if you are going to analyze any company whom you want to invest through its IPO. There is almost nil historical information available on the public domain to start with. The only source of data about such companies is their red herring prospectus (RHP) or the draft RHP. Thus, this is the document which needs to be scanned with utmost care before making any investment decision in the said IPO. Particularly one should look for the following in any company before making a decision to invest.
The underwriters and investment banks act like salesmen to an IPO they are dealing with. They stand in between companies and investing public. Actually, a company can't directly go to the market to sell their share. It needs to be done through proper mechanism.
Stock exchange provides a platform that facilitates such a transaction. Brokers are intermediaries then executes buy and sell transactions. Likewise, are underwriters and investment bankers. They facilitate the company with the IPO proceedings. Also, the underwriters have the obligation to buy all shares under offer, in case of no buyers of the shares during IPO proceedings. As per SEBI, some portion needs to be subscribed so that underwriters can exercise their rights of underwritings.
IPO gives dual benefit to a company opting for that route. It gives an exit strategy to maximizes the returns of early phase investors and at the same time help raise capital for the business at minimum cost. Companies can come up with IPO either through Public Issue or Offer for Sale (OFS) or combination of both. Under Public Issue, companies sell a portion of their issued capital to investors. While in OFS, the existing shareholders sell all or portion of their holding to the investors. The proceedings from Public Issue goes to the issuing company while OFS proceeds go directly to the selling shareholders.
Raising capital through IPO is a primary market activity and companies are allowed to do so either on Fixed Price or Book Building basis or a combination of both. The following table will help you understand the basic difference between the two.
Securities offer and allotment prices is made available in advance
Initially investors are allowed to bid in a 20 % price band while the final price is determined after closure of the bidding
Actual demand of the share is known after the closure of the issue
Actual demand of shares at various prices is available on a real time basis during bidding period on concerned stock exchange window.
100 % advance payment is required during the time of application.
Only 10 % advance payment is required by the QIBs with the application. Other categories need to pay 100 % advance with application.
50 % offered shares reserved for applications below Rs.1 lakh. The balance for higher amount applicants.
50 % reserved for QIB, 35 % for small investors and the balance for other investors.
Thus, a company has a variety of option to come up with the initial public offering. The public issue with Fixed Price, Public Issue with Book Building or Fixed Price Offer for Sale, OFS on Book Building basis, and a combination of Public Issue and OFS are some of the available options.
India SME's are playing a prominent role not only in employing workforce but also in GDP growth. According to some estimate SME in India employees above 40% of the workforce and over 45% of total manufacturing output.
But the major problem with most of these SME's is access to proper financing. Besides traditional financing facilities, they don't have many options left. So, in order to give them an additional funding option both NSE and BSE came up with a separate window for them to access the capital market. The major hurdle was that the current regulation has made it difficult for them to tap the capital market route for funds raising.
BSE named SME platform as 'BSE SME' while NSE as 'EMERGE'. These platforms opened a new chapter in the history of the capital market in India. It opened the gate for SME's to tap these high potential market for funds raising.
The following table differentiates SME IPO form that of main IPO.
Regular IPO (Mainline IPO)
Paid Up Capital (Post-issue)
Minimum ₹10 Cr
Minimum ₹1 Cr and Maximum ₹25 Cr
No of Allotees
Underwriting of IPO
100% Mandatory (15% must be from Merchant Banker)
Minimum 50% compulsory
Stock Exchange Vetting
₹10000 to ₹15000
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