The full form of IPO is Initial Public Offering. This refers to the process where a private company offers its shares to the public for the first time and marks its transition to becoming a publicly traded company.
- What Do You Mean By IPO?
- Examples of IPO
- Objective Of IPO
- Initial Public Offering Process
- Types of IPO
- Advantages Of IPO
- Disadvantages Of IPO
- How To Apply For IPO?
- How To Bid For IPO?
- IPO Allotment Process
- What Is The Full Form Of IPO? Quick Summary
- What Is IPO Full Form – FAQs
What Do You Mean By IPO?
An Initial Public Offering (IPO) is the process through which a private company goes public by offering its shares to the general public for the first time. In simple terms, an IPO marks a private company’s transition into a publicly traded and owned entity.
Take, for instance, Zomato, one of India’s leading food delivery service providers. The company announced its IPO in July 2021, shifting from a privately held firm to a publicly traded company on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
Examples of IPO
The most recent and significant example of an initial public offering (IPO) in India is that of Paytm, which is widely regarded as one of the most successful online payment platforms in the country. Paytm held the first-ever initial public offering (IPO) in November 2021 with a size of 18,300 crores, making it the largest ever in the Indian market. Despite significant hype, the stock experienced a lackluster debut, underlining the risks and volatility often associated with IPOs.
Objective Of IPO
The primary objective of an IPO is to raise capital. Companies go public to gather funds to help fuel their future growth, pay off debts, or facilitate acquisitions.
Other objectives include:
- Increase company’s exposure, prestige, and public image
- Attract and retain better management and employees through liquid equity participation
- Enable cheaper access to capital
- Provide liquidity to investors and stockholders
- Create multiple financing avenues – equity, cheaper debt, convertible securities
Initial Public Offering Process
An IPO process starts when a private company decides to go public. Here is how the process of IPO works:
- To begin listing on the stock market, a company first hires a merchant banker to guide them through the subsequent steps.
- The company must obtain preliminary approval from SEBI (Securities and Exchange Board of India).
- Following the initial approval, the company compiles a Draft Red Herring Prospectus (DRHP). This document details key information about the company, such as financial statements, the volume of shares being offered to the public, and the main objectives of the IPO.
- The company then establishes the price range for the shares. The marketing for the IPO begins at least two days before the initiation of the bidding process.
- Subsequently, stockbrokers like Alice Blue start accepting bids from the investing public.
- Upon completion of the bidding process, shares are allocated to successful bidders. Following this, the company’s stock is officially listed on the stock market.
Types of IPO
IPOs typically fall into one of two categories:
- Fixed Price IPO
- Book Building IPO
Fixed-Price IPOs: In this type of IPO, the price at which the company’s shares are offered is set in advance. This means that the company going public sets a price for the shares that will be sold to investors. This lets people know how much they have to pay for a share, but the price might not accurately reflect how much demand there is for the shares on the market.
Book Building IPOs: Unlike Fixed Price IPOs, in a Book Building IPO, the price of the shares is not set in advance. Instead, the company gives a range of prices, called a “price band,” that shows the lowest (floor) and highest (cap) prices. The bids for shares came in between these prices. The final price, called the “cut-off price,” is based on the bids. This method gives a more accurate picture of what the market wants, and investors can bid on the company’s shares at a price they think is fair.
Advantages Of IPO
The main advantage of an IPO is it boosts a company’s public image, aids in talent acquisition via employee incentives, allows debt repayment, reduces future capital raising costs, and diversifies the equity base. These factors contribute to enhancing the company’s reputation and financial health.
- Enhanced Public Image: An IPO helps elevate a company’s public profile. It can increase visibility, reputation, and brand value, attracting customers, business partners, and talented employees.
- Employee Incentives: Following an IPO, a company can offer employees stock options or stock purchase plans. These incentives can attract high-quality talent and enhance employee retention and motivation.
- Debt Repayment: The funds raised through an IPO can be used to pay off existing debts, reducing interest costs and improving the company’s financial health.
- Lower Cost of Capital: Being a public company may lower the cost of raising additional capital in the future, as it can issue more stocks or bonds at competitive rates.
- Equity Base Diversification: An IPO allows a company to expand its equity base, creating a broader, more dispersed ownership structure.
Disadvantages Of IPO
IPOs come with certain drawbacks including exposure to market volatility potentially causing early investors losses, and lock-up periods that limit liquidity options. They can also suffer from information asymmetry, an unpredictable impact from market sentiment, and possible stock price depression due to insider selling post-IPO.
- Market Volatility: After the IPO, the stock price can experience significant fluctuations in the short term, leading to potential losses for early investors who bought shares at a higher price during the initial offering.
- Lock-Up Periods: Early investors and company insiders often face lock-up periods after the IPO, during which they are restricted from selling their shares. This can limit liquidity options for investors, delaying their ability to realize profits.
- Information Asymmetry: Investors may face challenges in obtaining timely and accurate information about the company’s financial performance and prospects, particularly if the company is newly listed and lacks an extensive track record.
- Market sentiment: The success of an IPO and subsequent stock performance can be affected by market sentiment, investor confidence, and macroeconomic conditions. This makes it hard for investors to predict short-term stock movements.
- Insider Selling: Post-IPO, company insiders and early investors may choose to sell their shares in the open market, potentially leading to a temporary oversupply of shares and downward pressure on stock prices.
How To Apply For IPO?
Applying for an IPO in India has become a streamlined process thanks to online platforms like AliceBlue. Here are the steps to apply for an IPO via AliceBlue:
- Open a Demat account with Alice Blue.
- Log in to the Aliceblue IPO portal.
- Select the IPO you want.
- Enter your UPI ID and click the ‘Bid’ button.
- Choose the number of lots and the bid price.
- Click on ‘Submit’ to place your bid.
How To Bid For IPO?
While applying for an IPO, you must bid within the fixed price band. For example: Let’s say the price band or issue price of the IPO is between ₹ 100-110; you need to place your bid between 100-110.
If your bid matches or is greater than the cut-off price, you will receive the company’s shares. For example: Let’s assume that the price band is between 100-110 and the cut-off price is 107.
- If your bid was below 107, you will not get the shares.
- If your bid is 107, you will get the shares.
- If your bid is above 107, you will still get the shares, and the price difference between the bid and cutoff price will be refunded.
Once bidding is done, the shares will be allocated based on the allotment class you belong in. Let us learn about different types of allotment classes.
IPO Allotment Process
The IPO allotment process involves the allocation of shares to the applicants. Once the bidding process is over, the underwriters analyze the bids and decide the final issue price. The following steps outline the process:
- Under Subscription: This happens when the Issue is worth 100 Crores, and the people have subscribed for 100 Crores or Less. In this case, you will receive all the shares you applied for.
- Over Subscription: This happens when the issue is worth 100 Crores and the people have subscribed for more than 100 Crores. There are two types of oversubscription:
- Oversubscription by several people: For instance, let’s assume the Issue is worth 100 crores and the cost of 1 lot is ₹ 10,000. So 1 lakh people can apply for the IPO for 1 lot each (100 crores/10000). If more than 1 lakh people apply for the IPO, the company will have a lucky draw. The 1 lakh people whose name appears in the lucky draw will get the shares.
- Oversubscription by a number of lots: Keeping the above example in mind, overall, people can apply for 1 lakh lots (100 crores divided by the lot size[100 crores/10000]). So let’s say 50,000 people apply for 2 lakh lots. In this case, everyone will get the shares, but some people will get lesser lots as opposed to the number of lots they applied for, while some may get the exact number of lots.
What Is The Full Form Of IPO? Quick Summary
- The term IPO stands for Initial Public Offering, signifying the process where a private company offers its shares to the public for the first time and transitions to becoming a publicly traded company.
- The concept of an IPO, in simple terms, involves a private company’s shift into a publicly-traded entity. An illustrative example is Zomato’s IPO in July 2021, which marked its transition from a privately held firm to a publicly traded company.
- A key example of an IPO in India is Paytm’s IPO in November 2021, considered the largest ever in the Indian market, yet faced a lackluster debut indicating the inherent risks and volatility of IPOs.
- The primary objective of an IPO is to raise capital for various purposes, such as fueling future growth, paying off debts, or facilitating acquisitions. Other objectives include enhancing the company’s public image, attracting and retaining quality employees, enabling cheaper access to capital, providing liquidity to investors, and creating multiple financing avenues.
- The IPO process begins with the decision of a private company to go public. The process involves various steps such as the selection of an underwriter, due diligence and regulatory filing, pricing of the IPO, stabilization by underwriters post-IPO, and finally, transition to market competition.
- IPOs can be broadly categorized into two types – Fixed Price IPOs, where the share prices are fixed in advance, and Book Building IPOs, where a price band is provided and the final price is decided based on the bids received.
- The benefits of an IPO include capital inflow, enhanced public image, the attraction of high-quality talent, debt repayment, lower cost of capital, and diversification of the equity base.
- Applying for an IPO in India has become an easy process due to online platforms. The process involves opening a Demat account, selecting the desired IPO, entering the UPI ID, choosing the number of lots and the bid price, and finally submitting the bid.
- Alice Blue can help you invest in IPOs completely free of cost. They also provide Margin Trade Funding facility, where you can use 4x margin to buy stocks i.e., you can buy stocks worth ₹ 10000 at just ₹ 2500.
What Is IPO Full Form – FAQs
What Is an IPO In India?
An Initial Public Offering (IPO) in India refers to the process by which a private company in India offers its shares to the public for the first time. The company gets listed on stock exchanges like the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE), thereby becoming a publicly-traded entity.
Is It Good To Invest In Ipo?
Investing in IPOs can be rewarding if the company has strong fundamentals and growth prospects. However, it also comes with risks as the shares may be overpriced, or the company may underperform post-IPO. Thus, investors should thoroughly research the company’s financials, business model, and growth strategy before investing.
Who Is Eligible For Ipo?
Any Indian citizen aged 18 or above with a valid Demat account and PAN card can apply for an IPO in India. Foreign investors can apply subject to regulations by the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI).
Does IPO Give Profit?
An IPO can potentially give profits if the shares’ market price post-listing exceeds the price paid during the IPO. However, it’s important to note that share prices can be volatile and may also decline, leading to potential losses. The profitability of an IPO investment largely depends on the company’s performance and overall market conditions.
How Can I Benefit From an IPO?
Investors can benefit from an IPO in several ways. If the company performs well, its share price may increase, providing capital appreciation. Additionally, if the company pays dividends, investors can receive a steady income stream. Participating in an IPO also allows investors to get in at the ground level of a company’s public trading journey.