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Initial Public Offering

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Initial Public Offering
Initial Public Offering
Neelanjit Das - 30 May 2022

An initial public offering (IPO) is a process by which a privately-owned or non-listed company raises fund by way of offering shares to both institutional and retail investors. After the IPO, the company gets listed on the stock exchange. There are two types of IPOs—fixed price IPOs, and book-building process IPOs. In a fixed price IPO, the company’s financials are evaluated by the company and its appointed underwriters. In a book-building issue, there is no fixed price, but a price range. There are types of issues too. First, offer for sale is a mechanism by which a promoter or anyone who holds at least 10 per cent stake in the company sells his shares to investors. Second, fresh issue of shares, where a company issues new equity shares to investors.


How Does IPO Subscription Process Work?

  • The application for an IPO needs to be made through a bidding process, which involves investors bidding for the shares in a specified lot size.
  • The lot size is the minimum number of shares that investors have to subscribe to. A company divides its total offered shares in an IPO in equal numbers, and creates lots. For example, the Life Insurance Corporation (LIC) of India split its shares into lot sizes of 15 shares each during its recent IPO.
  • For IPOs issued by way of book- building, a price band is specified in the prospectus, and investors have to bid for shares according to their preferred lot size in that specified price band range.

How Is The IPO Pricing Decided?

  • Several factors are taken into account before an IPO is priced. These include, but are not limited to, the number of shares sold in the IPO, financial performance of the company, demand for the shares, market trend, the future growth rate of the company, price of its listed peers, and other fundamentals.
  • The two most popular methods  to calculate the price of an IPO are the absolute valuation approach and the relative valuation approach.
  • Companies hire underwriters, investment bankers, analysts and experts to formulate the process of valuation and pricing of an IPO.

How Are Shares Allotted In An IPO?

  • IPOs can either be oversubscribed, undersubscribed, or fully subscribed.
  • If an IPO is oversubscribed, i.e., investors bid for more shares than offered by the company, companies need to allot at least one lot of shares to retail investors, according to a Sebi rule. If the oversubscription is too big, then a computer-based lucky draw system allots the shares.
  • In case of undersubscription, the company needs to check whether at least 90 per cent is subscribed to or not. If 90 per cent is subscribed, then shares will be allotted, otherwise the company will forfeit the shares and return the money to the investors.
  • In case of a full subscription, investors get their full lot of shares bid for.
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