July 23, 2021
Zomato launched its IPO & broke the internet.
But what garnered the excitement of the general public? In order to understand that, let us understand all about IPO: Initial Public Offering.
What is an IPO?
IPO or initial public offering is the process of offering shares of a company directly to the public. The public can buy the shares of the company. This is how they obtain a listing on the stock market (private companies may issue stocks but aren’t provided to the public in the form of an IPO)
Why do companies launch an IPO?
There are various reasons why a company decides on launching an IPO. The most important reasons are given below:
1. Raise Capital for expansion
One of the most important benefits of having an IPO is that it helps in raising capital for the business. Raising capital can help increase the growth and development of a company as they can utilise it for more research, infrastructure development, corporate expansion etc.
2. Value Assessment
Once a company’s stock gets listed in the exchange, its value is equal to what an investor is willing to pay for. Hence, it lets outsiders know the current value or worth of the company.
Value assessment is indispensable for a company willing to grow in future and carry out mergers and acquisitions.
3. Increase Credibility:
A company’s credibility may grow when they go public. The financial data of the company would be accessible to the public with SEBI’s strict regulations. This will enhance transparency and build trust with the public.
Eligibility for IPO
Below are the eligibility criteria for a company to go public:
- The company must have a minimum net worth of Rs. 3 crores.
- It must have been in business for at least 3 years.
- The company must have made profits in at least 2 out of the 3 most recent financial years.
- At least 25% of the company must be owned by the public (i.e. not held by promoters or related parties).
- The audited financial statements for the past 3 years must be clean, with no qualifications or exceptions.
- It must have a minimum paid-up capital of Rs. 1 crore.
- The net profit in the last 3 years must be positive.
- The company should not have defaulted on any loan and/or overdraft from any bank or financial institution.
What is the procedure to launch an IPO?
When a company wants to get listed, they advertise to its underwriters by soliciting private bids or by making a public statement to generate interest.
The IPO process is led by the underwriters chosen by the company.
Who is an underwriter?
|An underwriter explores and evaluates an investor’s risk in any kind of investment. They belong to a financial organization.|
Steps to launch an IPO:
1. Hiring an Underwriter or Investment Bank
To start the initial public offering process, the company approaches an investment banker and banker who acts as an underwriter for raising the funds. The investment bank studies the important financial parameters of the company and signs an underwriting agreement. The underwriting agreement has the following components:
- Details of the deal
- Amount to be raised
- Details of securities being issued
2. Registration for IPO
A registration statement and a draft prospectus are created by the company and the investment bank of their choice.
The company has to submit the Red Herring Prospectus (also known as the RHP) document that the issuer and the underwriters use to market the initial public offering.
All information about the business except the number of shares and their price will be provided in this document. This document also provides information to the investors about where the money raised through the IPO will be used. This would enable the investors to trust the developmental process of the business.
RHP is the most important document that an investor can use to evaluate the offer.
3. Verification by SEBI (The Securities and Exchange Board of India)
Market regulator, SEBI then verifies the facts provided by the company. Once it is verified, the application goes through an approval process and a date is fixed for announcing its IPO.
4. Submit Application To The Stock Exchange
The Stock exchange receives an application form from the company with its initial issue.
5. Create awareness in the market
Before a company decides to go public, the company advertises the impending IPO in the market all across the country through road shows, company events etc.
This is basically to attract potential investors so that once the company goes public, investors can pour in and buy their shares.
6. Pricing of IPO
The Pricing of IPO can finally begin either through
- Fixed Price wherein the stock price of the company is announced beforehand or
- Book Binding Offering wherein only 20% of the price range is announced and the remaining would be filled in by the investors who can place their bids as per the minimum number of shares to be purchased.
Investors can relook at their bids since the booking is usually open from three to five working days.
After the bidding process gets over, the company will determine the Cut-Off price will be evaluated by the company.
Cut-off price= Final price at which the issue will be sold.
7. Allotment of shares:
The number of shares to be allotted to each investor will be decided by the company and the underwriters once the share price is fixed. It takes around 10 days from the last bidding date for the allotment of the stocks to the investors.
How can you benefit from IPO?
1. Get in on the action early:
By investing in an IPO, you can enter the ‘ground floor’ of a company with high growth potential. An IPO may be your window to rapid profit in a short time period. It may also help grow your wealth in the long run.
Suppose, you invest in a young company that sells disruptive technology. If it manages to sway the market and rake in profits, you would gain from its success too.
“In 1997 when Amazon.com Inc. floated an IPO, each share was priced at $18. So if you had invested $5,000 in Amazon’s IPO, your shares would have been worth $2.5 million in April 2018“
2. Long-term financial goals:
IPO investments are equity investments. Historically investment in the equity market has given 12-15% return over a 5-year horizon. So keeping in mind the long-term financial goals and returns, investment in equity instruments through IPO can fulfil your long-term financial goals of generating better returns.
The cumulative returns earned can help you to fulfil long-term financial goals like buying a house.
Besides, the Indian IPO market is growing. In 2017, $11 billion was generated by the Indian stock market through IPOs.
Anyone investing in an IPO becomes a company shareholder by default. This enables the investors to be associated with the goals and profit levels of the company they have invested in. The price per security issued is clearly mentioned in the IPO order document. So, you have access to the same information as bigger investors.
You will also have access to all the financial statements, and audit reports as will have to be shared with shareholders and in the public domain.
Future Forward Banking for Startups
The startup ecosystem has been booming in India. A number of startups like LIC, Delhivery and Nykaa have recently gone public.
From choosing the right business banking to dreaming about the day your company goes public, the journey of a founder is overwhelming.
New-age Business Banking in the same way has helped shape the financial operations of businesses today significantly.
- One-stop banking solutions platforms like RazorpayX allows business owners to open current accounts, pay taxes, schedule payments, pay vendors seamlessly and check invoices from a single dashboard. This saves valuable time and effort.
- It is an accounting and banking platform that fills the gap between advanced banking solutions and finance professionals. It allows easy accounting software integration.
- With RazorpayX Payroll, businesses can automate salary payments and provide insurance policies to their employees.
Frequently Asked Questions:
What is IPO?
IPO or initial public offering is the process of offering shares of a company directly to the public. The public can buy the shares of the company.
How can you benefit from IPO?
When you invest in a company you become directly associated with the company, their goals and its objectives. Investing in IPO can help bring great returns for your business in the long run.
Which are the companies that recently launched IPO?
Some of the companies are Nykaa, Delhivery, Zomato which recently launched IPO.