One of the inputs that all businesses require is capital. Not only is capital necessary to fund the existing operations of a business, but also to expand its scale. There comes a stage in the life cycle of businesses when the avenues to raise capital become limited or inadequate.
This is one of the main reasons why companies opt to go public through an Initial Public Offering or IPO. In this article, we shall delve into IPO meaning, IPO process, how to apply for an IPO, and the difference between an IPO and FPO.
Ipo Meaning And Types
Let us begin by discussing the meaning of an IPO. An Initial Public Offering is the first public issue of shares by a previously privately held company. Through the IPO route, companies can raise capital for a variety of reasons, including expansion of operations and debt servicing.
One prominent advantage of IPOs is that it helps a company become listed on a stock exchange. Following this, the company’s shares can be traded on said stock exchange.
There are two main types of IPOs: Fixed Price IPO and Book Building Issue. In the former type of IPO, the shares are offered to the public at a fixed price determined by the company and the investment banker/s for the issue.
In stark contrast, the offer price for shares in a Book Building Issue is a price band. The final price is determined post the closing of the issue based on the subscription volumes for the issue.
Difference Between An Ipo And Fpo
Now that we have discussed IPO meaning and types, let us discuss the Difference between IPO and FPO. While an IPO is the first offering of shares to the public by any company, a Follow-on Public Offering or FPO refers to a public issue that follows an initial issue. All public issues of shares by a company post its IPO are categorised as FPOs.
Ipo Process In India
In order to launch an IPO, a company hires investment bankers to oversee the legal formalities and operational details pertaining to the issue. Following this, the company submits a Draft Red Herring Prospectus to the Securities and Exchange Board of India, and seeks approval for its IPO.
Once SEBI approves the IPO, the company starts marketing the IPO through road shows, print media, and electronic media.
Applications to an IPO open on the designated date and close on the pre decided date. Once the issue is closed, the shares for each category of investors (retail investors, Institutional investors, etc.) are allotted. Then the company gets listed on a stock exchange.
Ways To Apply For Ipos In India
You can apply for an Initial Public Offering in India through online as well as offline modes. Let is discuss both modes of IPO application.
1. Online Application
In order to apply for an IPO online, you can use either your demat account or your bank account. To apply using your demat account, you can access the account, search for the relevant IPO, enter the required number od lots and bid price, and submit the application.
For applications through your bank’s Internet Banking facility, you must access the same on the official portal, search for the required IPO, enter the necessary details (lot size and bid price) and complete the application.
2. Offline Application
You can apply for IPOs through designated bank branches that offer Application Supported by Application Money. Alternatively, you can apply for an IPO offline through a stock broker.
The Bottomline
We hope this information on IPO meaning and types, process, and modes of application is helpful to you. You must carefully assess an IPO on various parameters before investing in it.
Frequently Asked Questions
1. What is an IPO?
An Initial Public Offering (IPO) is when a private company offers its shares to the public for the first time. It allows the company to raise capital by selling ownership stakes to investors.
2. Why do companies go public through an IPO?
Companies go public to raise funds for growth, expansion, debt repayment, or other operational needs. IPOs also increase visibility, credibility, and provide liquidity to early investors.
3. How does an IPO process work?
The IPO process typically involves a company working with investment banks to underwrite the offering. The company files necessary documents with regulatory bodies, like the Securities and Exchange Commission (SEC), sets the price of shares, and then offers them to the public.
4. What are the benefits of investing in an IPO?
Investing in an IPO can provide an opportunity to buy shares at an early stage. If the company performs well, early investors can benefit from significant price appreciation.
5. Are IPOs risky investments?
Yes, IPOs can be risky. There’s no guarantee that a company’s stock will perform well post-IPO. New public companies may experience volatility as the market assesses their value.
6. How is the share price determined in an IPO?
The share price in an IPO is typically determined by the underwriters based on the company’s financial health, market demand, and growth potential. It reflects what the market is willing to pay for a stake in the company.
7. Who can participate in an IPO?
Both institutional investors (like mutual funds and pension funds) and individual retail investors can participate in an IPO. Retail investors usually apply through their brokers or online platforms.
