Initial Public Offering (IPO) is a process by which a private company becomes a public company by the sale of its shares on the stock exchange. It can also be said as a process by which a private company can become a listed company.
From an investor point of view, IPO gives a chance to the investors to buy shares of a company, directly from the company at the price of their choice (In book build IPO’s).
From the perspective of a company, IPO helps them to identify their real value which is decided by millions of investor once their shares are listed in stock exchanges. In case of a successful IPO, it helps in improving the valuation of the company. IPO’s also provide funds for their future growth or for paying their previous borrowings.
Advantages and Disadvantages of Going Public Using an IPO
Advantages of IPO
- It gives an ability to the company to raise capital from a large number of investors.
- The company can use the funds raised to further enlarge its business.
- It increases the company’s exposure, prestige, valuation and public image, which can help in increasing the company’s sales and profits.
- The most important advantage of IPOs is that the company doesn’t have to pay any interest to its shareholder, whereas, in case of a loan payment of interest becomes a compulsory obligation for the company.
Disadvantages of IPO
- The process of coming up with an IPO is a very complicated, tedious and an expensive process. It takes a period of an average of 6-9 months or even longer.
- When a private company goes public, the company is required to disclose all the significant information about the company.
- When shareholders gain a significant ownership stake in a company, they can vote to override management decisions, or vote to get rid of managers and directors altogether.
- Companies have to face the risk of under subscription. If the issue is not subscribed up to 90% then all the costs and expenses incurred would go waste.
Requirements for applying IPO
- An investor can apply only at a cut off the price which is the higher of the bid price.
- PAN is required for the investor.
- An investor should have a Demat account of either NSDL or CDSL.
- The total bid amount for the IPO application will remain locked until the allotment is done. The investor cannot utilize the amount in the locked period.
Some Important Terms
Depository: A depository can be compared to a bank. A depository holds securities (like shares, debentures, bonds, Government Securities, units etc.) of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities. There are two main depositories in India, namely, a) National Securities Depository Ltd. (NSDL) and b) Central Depository Securities Ltd. (CDSL), both of which are regulated by SEBI.
Depository Participant: A Depository Participant is the registered agent of the depository concerned and it is through the DP that an investor gets the services of a depository. To avail this service, one has to open a Depository Account with the DP. Banks, financial institutions, and stock brokers are acting as Depository Participants after obtaining the required approval from SEBI and also complying with other statutory requirements. The Depository Participant manages all transactions on your DMAT account and provides an e-broking ID or client ID to identify your relationship with the DP.
DP ID: This is the Depository Participant ID with whom your demat account is maintained. It is 8-character starting with ‘IN’. This is applicable for NSDL only.
Client ID: This is your 8-digit demat account number. This is applicable for NSDL only.
Beneficiary DP a/c number: It is the 16 digits demat account number. This is applicable for CDSL only
Types of IPO
There are two types of IPOs:
- Fixed Price Issue
- Book Building Issue
The initial price offer can be made through the fixed price issue or book building issue or a combination of both
Fixed Price Issue
Under a fixed price issue, the company going public determines a fixed price at which its shares are offered to investors. The investors are aware of the share price before the company goes public. This price which is fixed per issue is printed in the prospectus of the company along with the justification of the price with qualitative and quantitative factors. Demand from the markets is only known once the issue is closed. To invest in this type of IPO, the investor must pay the full share price when making the application. Companies do not usually come up with an IPO with a fixed price.
Book Building Issue
In the book building issue, the price is discovered during the process of IPO. There is no fixed price, but there is a price band. The lowest price in the band is referred to as the ‘floor price’ and the highest price is referred to as the ‘cap price’. The company going public offers a 20% price band on shares to investors. Investors then bid on the shares before the final price is settled once the bidding has closed. Investors must specify the number of shares they want to buy and how much they are willing to pay. These days companies follow this process to come up with an IPO
Categories of Investors for an IPO
These are the 4 types of investors who are eligible to invest in IPO:
- Qualified Institutional Buyers (QIB)
Financial Institutions, Banks, FII’s and Mutual Funds who are registered with SEBI are called QIB’s. They usually apply in very high quantities.
- Non-Institutional Investors (NII)
Individual investors, NRI’s, companies, trusts etc. who bid for more than Rs 2 lakhs are known as Non-institutional bidders. They need not register with SEBI like RII’s. Non-institutional bidders have an allocation of 15% of shares of the total issue size in Book Build IPO’s.
- Retail Individual Investors (RII)
Retail individual investor category includes those investors who cannot apply for an amount of more than Rs 200000. Retail Individual investors have an allocation of 35% of shares of the total issue size in Book Build IPO’s. NRIs who apply for the IPO for an amount of up to Rs 200000 are also considered as Retail Individual investors.
- High Net worth Individual or investors (HNI)
If an individual applies to an IPO for an amount of more than Rs 2,00,000 then the individual will be considered as High Net worth Individual (HNI).
IPO Refund is given to the investors by the merchant bankers to the applicants of IPOs. In India, these IPO Refunds are generally made through Electronic Clearing Services (ECS) for pre-designated numbers of centers. The clearing houses that are also involved in the process of IPO Refund are controlled by the apex bank of India, The Reserve Bank of India. These IPO Refunds are also made by direct credit and real time gross settlement (RTGS), as per the laid down eligibility criteria of the applicant. For applications, which are made completely in the dematerialized form, the relevant details of bank account of the IPO applicant are taken from depositories.
Withdrawal/Alteration of IPO applications
In book built issues applicants (except for QIBs) can revise or withdraw their bids till the issue closure date. ASBA bids can also be withdrawn. During the bidding period, you can approach the same bank to which you had submitted the ASBA and request for withdrawal through a duly signed letter citing your application number. After the bid closure period, you may send your withdrawal request to the Registrars, who will cancel your bid and instruct Self Certified Syndicate Banks (SCSB) to unblock the application money in the bank account after the finalization of basis of allotment.
Application Supported by Blocked Amount
ASBA means “Application Supported by Blocked Amount”. ASBA is an application containing an authorization to block the application money in the bank account, for subscribing to an IPO. If an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized, or the issue is withdrawn/failed. The amount of the IPO application money gets blocked till the allotment status is known.
To apply through the ASBA facility Investor submits the ASBA form (available at the designated branches of the banks acting as SCSB) after filling the details like name of the applicant, PAN number, demat account number, bid quantity, bid price and other relevant details, to their banking branch by giving an instruction to block the amount in their account. In turn, the bank will upload the details of the application on the bidding platform. Investors shall ensure that the details that are filled in the ASBA form are correct otherwise the form is liable to be rejected.
These days’ investors can apply through the bank’s online portal.
SEBI has been specifying the investors who can apply through ASBA. In public issues w.e.f. May 1, 2010, all the investors can apply through ASBA. In rights issues, all shareholders of the company as on record date are permitted to use ASBA for making applications provided he/she/it:
- is holding shares in dematerialized form and has applied for entitlements or additional shares in the issue in dematerialized form;
- has not renounced its entitlements in full or in part;
- is not a renouncee;
- who is applying through blocking of funds in a bank account with the SCSB
Reverse book building
In simple words, reverse book building is a process that companies use to delist its shares from the stock exchange through the buyback process. When a company has excess cash on their balance sheet or the company wants to increase the shareholding of the promoters or when a promoter wants to delist the shares from stock exchange they can buy-back the shares from existing public shareholders through a Reverse Book Building process, subject to necessary approvals from SEBI.
Securities and Exchange Board of India has issued the SEBI (Delisting of Securities) Guidelines 2003’ for delisting of shares from stock exchanges. The guidelines provide the overall framework for voluntary delisting by a promoter.
Process for Reverse Book Building is as follows:
- The promoter or acquirer shall appoint a Merchant Banker and also a trading member for placing bids on the online electronic system.
- The Merchant Banker and promoter shall make a public announcement about the floor price and also dispatch a letter of offer to the public shareholders along with a bidding form. The floor price would be calculated by averaging the last 26 weeks / 6 months average closing price of the stock (Assuming such price is higher than the ruling / prevailing price in the stock market).
- Shareholders may approach the trading member for placing bids/offers on the online electronic system with the bidding form. The shareholders can bid at the floor price or above the floor price.
- The shareholders desirous of availing the exit opportunities are required to deposit their shares to the trading members prior to placement of orders. Alternately, they may mark a pledge for the shares.
- The final offer price shall be determined as the price at which the maximum number of shares has been offered.
- The promoter shall have the choice to accept / not accept the price.
- If the price is accepted, the promoter shall be required to accept all valid offers up to and including the final price.
- However, if the quantity eligible for acquiring securities at the final price offered does not result in promoter holding crossing the limits specified in the Regulations, the offer shall be deemed to have failed and the company shall remain listed.
- At the end of the offer, the merchant banker to the book building exercise shall announce the final price and the acceptance (or not) of the price by the promoter. Any remaining public shareholders may deposit shares to the promoter at the same final price up to a period of one year from the date of delisting.
Follow on Public Offering (FPO)
Follow on Public Offering (FPO) is when an already listed company makes a fresh issue of securities to the public with a view to diversify its equity base. The shares are offered for sale by the company through an offer document called prospectus.
There are two types of Follow-on Public Offering:
Dilutive offering: In this type of offering the company issues new shares. With the issue of new shares, the powers in the hands of existing shareholders get diluted.
Non-Dilutive offering: When the offer is made by the existing shareholders then the powers of the existing shareholders do not get diluted. Follow-on public offers from existing shareholders often involve founders or other managers (such as venture capitalists) selling all or a portion of their stakes in a company.
|BASIS FOR COMPARISON||IPO||FPO|
|Meaning||Initial Public Offering (IPO) refers to an offer of securities made to the public for subscription, by the company.||Follow-on Public Offering (FPO) means an offer of securities for a subscription to the public, by a publicly traded enterprise.|
|What is it?||First public issue||Second or third public issue|
|Issuer||Unlisted Company||Listed Company|
|Objective||Raising capital through public investment.||Subsequent public investment.|