INITIAL PUBLIC OFFER

 

WHAT IS AN IPO?

Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company are sold to institutional investors and usually also retail (individual) investors; an IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchanges. Through this process, colloquially known as floating, or going public, a privately held company is transformed into a public company.

Initial public offerings can be used:

  1. to raise new equity capital for the company concerned; to monetizethe investments of private shareholders such as company founders or private equity investors;
  2. to enable easy trading of existing holdings or future capital raising by becoming publicly traded enterprises.

After the IPO, shares traded freely in the open market are known as the free float. Stock exchanges stipulate a minimum free float both in absolute terms (the total value as determined by the share price multiplied by the number of shares sold to the public) and as a proportion of the total share capital (i.e., the number of shares sold to the public divided by the total shares outstanding). Although IPO offers many benefits, there are also significant costs involved, chiefly those associated with the process such as banking and legal fees, and the ongoing requirement to disclose important and sometimes sensitive information

 

PROSPECTUS

Details of the proposed offering are disclosed to potential purchasers in the form of a lengthy document known as a prospectus. Most companies undertake an IPO with the assistance of an investment banking firm acting in the capacity of an underwriter. Underwriters provide several services, including help with correctly assessing the value of shares (share price) and establishing a public market for shares (initial sale). Alternative methods such as the Dutch auction have also been explored and applied for several IPOs.

 

ADVANTAGES OF IPO

An IPO accords several benefits to the previously private company:

  • Enlarging and diversifying equity base
  • Enabling cheaper access to capital
  • Increasing exposure, prestige, and public image
  • Attracting and retaining better management and employees through liquid equity participation
  • Facilitating acquisitions (potentially in return for shares of stock)
  • Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.

DISADVANTAGES OF IPO

There are several disadvantages to completing an initial public offering:

  • Significant legal, accounting and marketing costs, many of which are ongoing
  • Requirement to disclose financial and business information
  • Meaningful time, effort and attention required of management
  • Risk that required funding will not be raised
  • Public dissemination of information which may be useful to competitors, suppliers and customers.
  • Loss of control and stronger agency problemsdue to new shareholders
  • Increased risk of litigation, including private securities class actions and shareholder derivative actions

OFFER PRICE VS OPENING PRICE

The offering price of an IPO is the price at which a company sells its shares to investors. The opening price is the price at which those shares begin to trade in the open market. The difference between the two is the amount of instant profit or loss for investors in that initial public offering of stock, and it often indicates whether IPO shares are likely to go up or down.

WHO SETS THE OFFERING AND OPENING PRICE OF AN IPO?

  • The underwriter sets the offering price based on the amount of capital the company wants to raise and the level of demand from investors.
  • The opening price is set by supply and demand. Few investors can buy an IPO at the offering price, because most shares go to the underwriter’s best institutional clients, and some are reserved for the company’s “friends and family.” So most investors’ only option is to buy in the open market when the shares start trading.
  • The day an IPO is released, buy and sell orders pile up until they are balanced against each other, determining the opening price. If the demand for shares exceeds the supply, the shares open higher than the offering price; otherwise they open lower.

METHODS OF IPO

Corporates may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market.

This Initial Public Offering can be made through the fixed price method, book building method or a combination of both.

BOOK BUILDING PROCESS- Book building is a price discovery mechanism that is used in the stock markets while pricing securities for the first time. If the company is not sure about the exact price at which to market its shares, it can decide a price range instead of an exact figure. This process of discovering the price by providing the investors with a price range and then asking them to bid on it is called the book building process. It is considered to be one of the most efficient mechanisms of pricing securities in the primary market. This is the preferred method which is recommended by all major stock exchanges and as a result is followed in all major developed countries in the world.

PARTIAL BOOK BUILDING-Partial book building is another variation of the book building process. In this process, instead of inviting bids from the general population, investment bankers invite bids from certain leading institutions. Based on their bids, a weighted average of the prices is created and cut-off price is decided. This cut-off price is then offered to the retail investors as a fixed price. Therefore, the bidding only happens at an institutional level and not at a retail level.

This is also an efficient mechanism to discover prices. Also the cost and complications involved in conducting a partial book building are substantially low.

FIXED PRICE ISSUE- Under fixed price, the company going public determines a fixed price at which its shares are offered to investors. The investors know the share price before the company goes public. Demand from the markets is only known once the issue is closed.

CURRENTLY OPEN ISSUES

 

Equity

Type

Issue Price

Issue Size

Lot Size

Issue Open

Issue Close

Sudarshan Pharma

SME IPO

75

25.8

1600

12-Jun

17-Jun

             

Meera Industries

SME IPO

225

11.75

500

13-Jun

18-Jun

 

 

 

 

 

 

 

Anand Rayons

SME IPO

27

12.66

4000

18-Jun

24-Jun

 

 

 

 

 

 

 

Parshva Enterprises

SME IPO

45

3.65

3000

19-Jun

21-Jun

 

By 

Himanshu Bhola