Understanding Ipo

Initial Public Offering (IPO) is the first sale (primary) of a companys shares to investors

. The main purpose of an IPO is to raise capital to fund expansion or modernization plan being undertaken by the company. In simple words when one is investing in IPO he or she is investing in the shares of the company. The company can issue fresh shares, resale of existing shares or may be both. If a company, which is already listed, sells newly issued shares to the market, it is called a "follow-on" offering. When a shareholder sells shares it is called a "secondary offering". These secondary offerings are done on the regulated stock exchanges and in general terms known as buying and selling of shares. Issues pertaining to IPO in India are governed by the SEBI (Disclosures and Investor Protection) guidelines.

The subject of the article is to understand IPO investment in India.

Any company making a public issue of value of more than Rs.50 lakhs is required to file a draft offer document with the SEBI for its observations. The validity period of SEBIs observation letter is three months only i.e. the company has to open its issue within three months after filing an offer document.

Draft Offer document means the offer document is in draft stage. The draft offer documents are filed with SEBI, atleast 21 days prior to the filing of the Offer Document with ROC/ SEs. SEBI may specify changes, if any, in the draft Offer Document and the issuer or the Lead Merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC/SEs. The Draft Offer document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI.

Another integral issue in IPO investment in India is prospectus. Offer document means Prospectus in case of a public issue or offer for sale. An offer document covers all the relevant information related to IPO investment.

Red Herring Prospectus is a prospectus which does not have details of either price or number of shares being offered or the amount of issue. This means that in case price is not disclosed, the number of shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later.

These documents are prepared by an independent specialized agency called Merchant Banker, which is registered with SEBI.

Generally, there are two types of IPOs one where price of shares are fixed and the another where price of shares are arrived after running book building process.

Book building is a process of price discovery. In this process floor price of shares or priceband of the shares are known to the public. The applicants bid for the shares quoting the price and the quantity they would like to bid at. Only the retail investors have the option to bid at cut-off. After the bidding process is complete, the cut off price is arrived.

by: Aditiya Mehta

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