This article covers all the points on initial public offering (IPO). Let’s understand each section in detail.
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What is (Initial Public Offering) IPO?
In simplest terms an IPO is a process by which a company can raise funds & become from private to public and register themselves in the stock exchange. Now for this they offer fresh shares to public or they offload shares by existing shareholders and promoters through OFS (Offer for sale).
Let’s understand chronology and process behind IPO
Why do companies go for an IPO?
- Let’s start from the basics, when a business starts, they need fund to operate it.
- The key people who invest in your business in this starting stage are called Angel Investors.
- Angel investors invest in small amounts as this is a risky stage.
- The money supplied by Angels is called a seed fund.
- When a company expands, they need more funds to invest.
- Here Venture Capitalists come into picture who helps the company at this early stage of business.
- You might have heard the term Series A, B, C round of funding. So all this funding happens at this stage by Venture Capitalists(VC).
- When a company further evolves and enters at a mature stage, they need more money for capital expenditure and expansion.
- Then they go to Private Equity firms (PE).
- PE invests in the mature stage of a business and they take lesser risks as compared to the Angel investors and Venture capitalists.
- After this if a company still wants to expand themselves, increase their CAPEX, restructure their debt, reward shareholders, they go for an IPO.
Advantages of Going for an IPO
Core reason of going for an IPO is always a fund requirement by the company to meet it’s expenses, reduce the debt and expand the business. Few other advantages are listed below.
- CAPEX Requirement : IPO funds are used to meet the capital expenditure requirements of the company.
- Debt reduction: They use the fund from the IPO to settle or reduce their debt.
- Risk Reduction: When a company goes for the IPO, it shifts the risk to a large number of people. So any person who holds the share of any company takes the same amount of risk as the promoter.
- Investors Promoters exit: Once the company is listed in stock exchange, investors, promoters can cash their investment in an open market and exit at any time.
- Employee Benefit: Many companies offer shares at a discounted price to their employees through ESOP (Employee Stock Option). After listing they have a fair chance to get returns which they can cash at any time.
- Business Transparency : Once the company is public domain there are more chances that it will be transparent and chances of growth will increase.
Process of an IPO | Steps involved for finalisation
So all the guidelines here are set by SEBI and any company going for an IPO has to follow each and every step as per the rule set by SEBI.
- Step 1 : Appointment of merchant banker. They are also called Book Running Lead Managers (BRLM)/ Lead Managers (LM). They are responsible for conducting due diligence and preparing DRHP (Draft Red Herring Prospectus).
- Step2 : Registration to SEBI : Registration contains details of what the company does, it’s financial health etc.
- Step 3: SEBI’s Call on IPO – Sebi has full rights to allow or disallow the IPO.
- Step 4: DRHP – If the company gets a positive signal from SEBI, then they prepare the DRHP which is actually the Bhagavad Gita of the IPO for investors. DRHP has all the information about the company, it’s financials, risks involved etc.
After this they Market the IPO, Fix the price band and do book building then the closure and listing happens on the decided day.
Grey Market Premium of Latest IPO | GMP of Live IPO
What is the Grey Market IPO?
Grey market is an unregulated market where the buyers and sellers trade shares and application before it’s listing on the stock exchange. As this is an unofficial market so no rules and regulations applied on it.
Grey market premium, Kostak rates and Subject to Sauda are few terms which you might have heard many times. Let’s understand these one by one.
What is Grey Market Premium?
Grey market premium or GMP is the premium value at which IPO shares are traded before their listing in the stock exchange. You can always consider GMP and track it to select the successful IPO. Let’s understand this with an example.
Suppose company “A” has an IPO price of Rs. 100 and it’s grey market premium is Rs. 50 then one can assume that it will list at Rs. 150.
However it will not always work. Listing price depends on many other factors as well. But in most cases GMP acts as a key point on deciding the listing price of an IPO.
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What is Kostak Rate ?
Kostak rate is the amount which an individual pays for the application before it’s listing on the stock exchange.
This is the way by which a seller can sell his entire application through kostak rate and fix their profit.
Here the plus point for the seller is, he doesn’t have to bother about the allotment. If he sold the application for X amount, he will get that X amount no matter whether the allotment happens or not.
Kostak Rate with example
Let’s suppose Ram has applied 10 applications for an IPO and he sold it in the grey market at 300 per application. It simply means Ram has secured his profit 10 x 300 = Rs. 3,000.
- If Ram has not got any application, still he will get the profit of Rs. 3,000.
- If Ram has got all the applications and has made a profit of 15,000 then he will have to give the remaining profit to the buyer who had bought the application from Ram.
Subject to Sauda
Subject to sauda is the deal through which IPO applications are sold in the grey market.
Here the plus point for the buyer is, he has to pay the amount to the seller only when the seller has got the allotment. The deal gets void if there is no allotment to the seller on the listing day.
Subject to Sauda with example
Let’s suppose Ram has applied 10 applications for an IPO and he sold it in the grey market at 500 per application.
- If Ram has not got any application then the deal gets void.
- If Ram has got 5 applications and made a profit of 10,000 then he will have to give the remaining profit to the buyer who bought the applications from Ram.
So here Ram will only make (5X 500 = 2500) profit.
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Subscription Status of Live IPO
- After SEBI approval, companies come with their IPO on NSE and BSE.
- IPO subscription is the number of times the public issue subscribed.
- There are four categories namely QIB, NII, RIL and Employee in which IPOs are subscribed. IPO subscription period for mainline IPO is 3 working days and for SME IPO, subscription period is 4-6 working days.
- Most of the time, IPO receives more bids than the number of shares they (company) offer.(Oversubscribed)
- Both exchanges provide live subscription data on their respective websites.
We also provide you live IPO subscriptions status of ongoing IPOs live number from NSE and BSE.
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