Upcoming IPOs in 2023
There are many companies and tech start-ups are expecting to go public next year.
Recently, we have seen a great inflow of Initial Public Offerings or IPOs by the companies in the market. If you are among the people who are wondering what an IPO is or what is the meaning of IPO? Here, we are to guide you through the basics of the term and the concepts around it.
What Is an Initial Public Offering (IPO)?
An initial public offering or an IPO is a process to convert a private company into a public company by offering shares of a private corporation to the public in a new stock issuance for the first time. An IPO allows a company to raise equity capital from public investors and creates an opportunity for smart investors to earn a handsome investment return.
The capital raised by the company through the offering is then used by the company for growth. IPOs are therefore a valuable tool for the rapid expansion of a company in need of capital. Meanwhile, it also allows public investors to participate in the offering and profit from holding shares of the company.
Types of Investors:
The investors are categorized into three major categories which are as follows:
- Qualified Institutional Buyers (QIB): Qualified Institutional Buyers or QIBs are those institutional investors who are generally perceived to possess the financial muscle and the expertise to evaluate and invest in the capital markets. The QIBs as per clause 2.2.2B (v) of DIP Guidelines are Public financial institutions as defined in section 4A of the Companies Act, 1956; Scheduled commercial banks; Mutual funds; Venture capital funds registered with SEBI, Foreign institutional investors registered with SEBI; Multilateral and bilateral development financial institutions; Foreign Venture capital investors registered with SEBI, State Industrial Development Corporations. Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA), Provident Funds with a minimum corpus of Rs.25 crores, and Pension Funds with a minimum corpus of Rs. 25 crores).
- Non-Institutional Investors (NII): The Non-institutional bidders or NII are those individual investors who bid for more than Rs 2 lakhs. Eligible NRIs, scientific institutions, HUFs, corporate bodies, companies, societies, and trusts who apply for Rs 2 lakhs or more of IPO fall under the NII category.
- Retail Individual Investor (RII): The Retail Individual Investor or RII are those individual investors who bid for a maximum of Rs 2 lakhs. Eligible NRIs, scientific institutions, HUFs, corporate bodies, companies, societies, and trusts who apply for less than Rs 2 lakhs in IPO fall under the RII category.
How an Initial Public Offering (IPO) Works
A company works unremittingly to ensure that it gets approval to file an IPO. A Company filing for an IPO has to abide by the IPO process in India before its shares are eligible to be publicly traded. This process of filing for an IPO is often complicated and long drawn. An IPO approval is granted by a regulatory authority. In India, it is the Securities and Exchange Board of India (SEBI). As difficult as it is with starting a new business, so it is with filing for an IPO.
The steps involved are:
- Hiring Of An Investment Bank Or Underwriter: The first step to start the IPO process, is for the company to take the help of financial experts, like investment banks. The underwriters act as intermediaries between the company and its investors and assure the company about the capital being raised. They will also study the crucial financial parameters of the company and sign an underwriting agreement. This agreement contains the details of the deal, the total amount to be raised, and the details of the securities being issued.
- Registration for Initial Public Offering (IPO): The next step involves the preparation of a registration statement along with the draft prospectus, also known as the Red Herring Prospectus or RHP. Submission of Red Herring Prospectus is mandatory, as per the Companies Act. This document comprises all the mandatory disclosures as per the SEBI and Companies Act. The RHP filed by the company contains
- General Information: It contains the definitions of the industry-specific terms and a summary of the issue document
- Risk Factors: This section discloses the possibilities and factors that could impact a company’s finances.
- Particulars of the Issue: This section discloses the object of the offer or how the money raised from investors will be used.
- Industry Description: This section provides details about the overall industry segment in which the company works. For instance, if the company belongs to the FMCG segment, the section will provide forecasts and predictions about the FMCG segment.
- Business Information: This section will provide details about the core business activities of the company.
- Management: This section provides information about key management personnel of the company like the promoters, promoter groups, etc.
- Financial Information: This section comprises the latest financial statements of the company along with the auditor’s report.
- Legal and Other Information: This section details the litigation against the company if any, along with miscellaneous information.
- Verification by SEBI: Market regulator, which for India is SEBI then verifies the disclosure of facts by the company. Only after the application is approved, the company can announce a date for its IPO.
- Creating a Buzz Pre-Opening: Before an IPO opens to the public, the company endeavors to create a buzz in the market through roadshows. Over a period of two weeks, the executives and staff of the company advertise the upcoming IPO across the country. This is basically an advertising and marketing tactic to attract potential investors. The company’s key highlights are shared with various people, including fund managers and business analysts. The executives adopt various user-friendly measures, like group meetings, Question and Answer sessions, multimedia presentations, online virtual roadshows, and so on.
- Pricing of IPO: The next step is to initiate the pricing of the IPO. There are two ways to do this:
- Fixed Price Offering: In the case of fixed price offering the price of the company’s stock is announced in advance.
- Book Binding Offering: In the case of Book Building Offering the price of the company’s stock is announced in terms of the price bracket with a price range of 20%, investors can place their bids within the price bracket, the minimum bid price is called IPO Floor Price, and the highest bidding price is called IPO Cap Price. The bid is open for three to five working days and after that, the company determines the final price which is also called the cut-off price, this is the price at which the issue is sold.
- Allotment of Shares: Once the IPO price is finalized, the company along with the underwriters determines the lot size or the number of shares to be allotted to each investor. There are two cases in which the situation of a company may fall in, that are:
- Total number of bids is less than or equal to the number of shares offered: In this case, the complete allotment of stocks will take place. Thus, every applicant applying for the IPO will be assigned shares per the lot size.
- Total number of bids is more than the number of shares offered: In this case, the Securities and Exchange Board of India or SEBI mandates that at least one lot should be allotted to every individual who has applied. In the case where there is such an oversubscription that even one lot cannot be allotted to every applicant, then allotment of the shares take place via a lucky draw. This lottery draw is computerized without any partiality for anyone. Thus, during such cases, some names are not drawn in the lottery system, and shares are assigned to only the applicant whose name is drawn.
- Greenshoe Option: A greenshoe option in the context of an IPO is an over-allotment option. Greenshoe options is a provision in an underwriting agreement that grants the underwriter the right to sell up to 15% more shares than the original amount set by the issuer for up to 30 days after the IPO if the demand for a security issue proves higher than expected.
- Post IPO: After the allotment of shares the company gets listed on the stock exchange for trading. The share may be traded at a price higher or lower than the IPO price, depending on the market’s demand. Some retail investors or institutional investors may sell off the stocks acquired by them from the IPO on the first day of trading. This may lead to a fall in stock price later on which is due to the excessive supply of the shares.
What is the IPO Timeline?
- Open Date: The opening date of the bidding process is known as the open date
- Close Date: The closing date of the bidding process is known as the close date. Any investor can apply or bid between the open date and the close date.
- Allotment Date: The date on which the registrar of the IPO announces the allotment status to the public is known as the allotment date.
- Refund Date: IPOs are applied through ASBA or Application Supported By Blocked Amount, due to which an investor’s application money is debited from his/her bank account only if his/her application is selected for the allotment till the date of allotment that money remains frozen in the investor’s account, the date on which the refund is initiated for the people who were not able to get the IPO, is known as the refund date.
- Credit to Demat Account Date: The date on which the investor receives the credit of the applied IPO shares in their Demat account before the listing date is known as the credit to Demat account date, this can be different for each company.
- Listing Date: The date on which the shares of a company are officially listed on the respective stock exchanges (NSE, BSE) (secondary market) and available for trading is known as the Listing date.
Advantages Of Investing In An IPO:
- Investing in an IPO lets you be a part of the company from the initial public growth, which gives you the opportunity to have significant growth in a very short span of time. Even in the longer run, the company may have the prospect of providing substantial returns as expected by the investor.
- The Investors are entitled to dividends and bonuses as earned by the company, depending on the number of shares that are owned by an individual.
- Provided that the company has good financial performance and a stable business model, investing in the company during an IPO can result in the creation of long-term wealth
Disadvantages Of Investing In An IPO:
- Investing in an IPO carries more risk than investing in the shares of a public company that is already established. The main reason for this is that there is very little information available to the public before the investment is made in an IPO, and there are various unknown variables at play.
- If the financial performance and the business model of the company are not up to the mark, it can prove to be a bad investment.
Conclusion: Initial Public Offerings or IPOs are generally considered beneficial as it lets the issuer company enlarge its equity base and increase its exposure. The decision of whether to invest or not to invest in an initial public offering is a choice of an investor, but it is one way to accentuate the earning potential of your investment. To make shrewd investment decisions, a lot of legwork is required. This includes selecting a reliable and trusted financial partner. You must select a trustworthy stockbroking firm like Elite Wealth that provides various benefits such as smooth trading platforms, zero Demat account opening chargers, an all-in-one account to trade in all investment options, award-winning research, and so on.