Initial Public Offering (IPO)

  • IPO or an Initial Public Offering is the first sale of a company’s equity to the public.
Why invest in IPO?
  • Good for beginners
  • Get slice of market action
  • Convenient
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Why do companies go for an IPO or become public?

  • An IPO raises capital for the company.
  • It dilutes equity holdings of founders and investors and brings public investors.
  • It gives capital to companies for expansion.
  • It is a moment of pride for the company as it boosts corporate image.

How does an IPO take place?

  • When a company wants to go public, the first thing it does is hire a financial advisor or an investment bank to manage the public issue.
  • The company and the investment bank meet to discuss the amount of money the company would raise, the type of securities to be issued, and all details in the underwriting agreement
  • The underwriter puts together what is known as the RED HERRING prospectus.
  • This is an initial prospectus containing all the information about the company except for the offer price and the effective date not known at that time.
  • With the red herring in hand, the underwriter and company attempt to find the appetite for shares. They go on a road show to tap institutional investors.

Issue Types

  • Fixed Price

    In a 'Fixed Price' shares are sold at a single price/fixed price. This price is determined by the company in advance, and you (the buyer) can buy the shares only at that decided price.

    E.g. If XYZ Industries Limited decides to make a public issue of 10,00,000 equity shares at a price of Rs. 65/- you can buy the share at Rs. 65/- and cannot ask for a price of Rs. 60/-

  • Book Building Issue

    'Book Building' is a price discovery mechanism used to determine the price of the security proposed to be issued. 'Book Building Issue' is generally used when the issuer doesn't want to fix a certain price on the security. Here, unlike the 'Fixed Price Issue', you (the bidder) have the facility to bid for the shares within the given range/price band.

    E.g. If XYZ Industries Limited decides to make a public issue of 10,00,000 equity shares, it will, instead of a fixed price, announce the price band of Rs. 60/- to Rs. 70/-. You (the bidder) can then place your bids for the shares between this price band/range.

Types of Applicants

  • Retail Individual Investor:- means an investor who applies or bids for securities of value not more than Rs. 2,00,000/-
  • Non-Qualified Institutional Buyer: means an investor who bids for an amount above Rs. 2,00,000/- and does not fall in the QIB category e.g. HNI investors.
  • Qualified Institutional Buyer(QIB) means:
    • Public financial institution as defined in section 4A of the Companies Act, 1956
    • Scheduled commercial banks
    • Mutual funds/venture funds/insurance companies/provident funds
    • Foreign Institutional Investor registered with SEBI

Ways of Applying for an IPO

You can invest in IPOs only through ASBA and only if you have a Trinity account with Kotak Securities. Using ASBA, you can invest in public issues by authorizing the bank to block an amount equivalent to the application amount in the linked bank account. The application amount is not debited from the account but remains blocked till the completion of allotment process. On allotment, amount required will be debited from the bank account whereas in case of partial or no allotment, the amount unutilized due to non-allotment will be released.

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