A private company goes public through IPO (Initial Public Offer). It is the first step for any company going public. The company needs funds for expansion, production capacity increase etc. So if you want to invest in IPO, understand the process of IPO would be helpful to you.
There are two types of companies
- Private Company
- Public Company
The public company is the one whose shares are traded on the stock market. But the public company has to start as a private company at the initial stage. The company which wants to go public has to saught many approvals and has to full fill many criteria set by the government. It has to offer some portion of the shares to the public who subscribe and to become a partner up to the extent they have to purchase the shares.
What is Initial Public Offer?
IPO is the process which enables private companies to go public to raise the fund for various activities like business expansion, repay the debt or simply dilute the stake of the promoters. By the way of IPO, the company gathers fund from the investors and thus investors become a partner in the company up to the extent of their share capital.
After the listing of the company’s IPO, the stock is freely tradable in the open market for all. An investor can buy or sell the stock from the open market at any time once the IPO is listed. The price of the IPO is generally set by the underwriter investment bank who helps the company in setting the price at which it will go public.
Why a private company goes public?
There are various reasons why a private company goes public. Below are the main reasons for going public.
- To raise money for numbers of reasons like expansion plan, for working capital need, repay debt, to acquire other company etc.
- To dilute the stake of the promoters. It helps to dilute the stake of the private equity investors and help to expand the customer base. Let me tell you in case you don’t know, there are pre-IPO market as well for the company where angel investors, venture capitalist and private equity investors are making a purchase of the stake of the company before it goes public. Launching an IPO will help them to dilute their stake.
- To create reputation and brand. Reputation plays a key role in the business. Listed companies are seen as a reputed one as compared to private companies. As they have to comply many rules and regulations set by the SEBI, they are perceived more credible in the market. It becomes easy for the company to borrow money from the market once it goes public.
Let’s understand the Pre IPO offer which is more lucrative than the IPO offer.
PRE IPO: FREQUENTLY ASKED QUESTIONS
1.What is the meaning of Pre-IPO?
Pre-IPO means buying/selling shares in a company before its IPO i.e. before it gets listed on the Stock Exchanges
2.Who sells shares in a pre-IPO?
Existing shareholders of the Company sell shares in the pre-IPO.
3.Is the Company involved in selling shares in a pre-IPO?
No.This is a secondary off-market transaction and the Company is NOT involved in any way in the transaction.
4.Are the shares being sold in the demat form?
Yes.The shares being sold are in the demat form.
5.If a company is not listed, how come the shares are in the demat form?
Any company which has more than 100 shareholders can pass a Board resolution and get its shares dematerialized with NSDL/CDSL
6.Why do investors buy in a pre IPO?
Most of the IPOs today are meant to provide exits to existing shareholders and not really for growth capital. As such, IPOs are priced expensive and even at those expensive valuations, retail investors do not get an allotment
Investing in pre-IPO helps the investor:
- To participate in the growth of the company
2.Get opportunities which otherwise would ONLY be available to big entities like PE Firms etc
3.Get in at reasonable valuations
7.What is the kind of time horizon is involved in investing in Pre-IPOS?
Most pre-IPOs take 2/3 years to get listed as it involves taking shareholder approval, getting internal processes in order, hiring merchant bankers, filing DRHP, getting SEBI approvals etc
8.What is the kind of returns one can expect in investing in pre-IPO?
Depends on the Company and its management’s execution capabilities.
Q.) Why Trade/Invest in Pre-IPO Stocks?
- If investing in IPO can give gains, then Investing in Pre-IPO may give more gains.
- Mostly Pre-IPO shares are available to PE(Private equity) firms and Big Investors only who exit in IPO.
- Past Performance:-
Galaxy Surfactants at 600-800 in pre-IPO made around 1700 after listing.
Hdfc Life at 150 to 180 in Pre- Ipo is now around 450
There are many such examples like D-mart and ICICI Lombard which have given similar returns.
Once the company has decided to go public, it hires the investment banker who manages the entire process of IPO filing and necessary approvals.
It also manages the bank account in which the fund will be credited. The underwriter then compiles all details of the public offer and prepare a document which is called prospectus. This document contains all necessary details of like total funds which needs to be raised, type of securities to be issued, where the fund will be used.
“ASBA” for subscribing to an IPO
Application Supported by Blocked Amount (ASBA) was introduced in the year 2008 for retail investors which have now been extended to corporate investors and HNIs from 1st January 2010.It is an electronic transaction in which the money remains in the bank account of the applicant unless the shares are allotted to him. Applicant has to give the authorization to block the money while submitting the application form.
The applicant just needs to collect the ASBA form and fill the necessary details like PAN number, demat account number, bid price, quantity and other important details. The applicant then submits the form to his bank and instruct the bank to block the money for IPO. The applicant can do only 1 application per PAN number for an IPO. Multiple applications with same PAN number will be straight away rejected. The capping of Rs 2 lakhs is applicable for the retail investor in IPO. IPO generally remains open for 3-4 days for the investor to subscribe.
The allotment of the shares of the company is decided by the company based on the quantum of subscription. There is an auto system which picks random application based on the set criteria. The investors then will be awarded the shares in their demat account and amount which was blocked at the investor’s bank will be transferred to the investment bankers account.
Checklist to invest in an IPO
These are the checklist you should look into before investing in an IPO-
- Conduct a background check on promoter’s capabilities.
- To gain an understanding of the company’s scalability in the future, look for the projects the company has in its pipeline.
- Look for the IPO’s issue size.
- Higher promoter stake is always considered good as it indicates a sense of responsibility on the part of promoters.
- Check the brand image of the company
The IPOs are generally overpriced as there are many private equity funding rounds already took place before launching of IPO. Stay cautious when you want to invest in IPO as there is hardly any benefit for the customer in IPO offer.