Initial Public Offering (IPO) represents the first sale (primary) of a companys shares to investors. The main purpose of an IPO is to raise capital to fund any expansion or modernization programme being carried out by the company. The company may make offer of either a fresh issue of share or an offer for sale of its existing shares or it can be both. If acompany, which is already listed, sells newly issued shares (again) to the market, it is called a ‘follow-on’ offering. When a stockholder sells shares it is called a ‘secondary offering’ and the shareholder, not the company who originally issued the shares, retainsthe proceeds of the offering. These secondary offerings are done on the regulated stock exchanges and in general known as buying and selling of shares. The primary issues in India are governed by the SEBI in terms of SEBI (Disclosures and Investor Protection) guidelines.
The offering contains the basic information: how many shares will be sold, how many shares will be outstanding after the offering, who is selling them, the use of return, the lock-up period and the symbol.
Generally, the fewer shares sold to the public, the more the potential investor demand for them can be. Very large offerings rarely present good investment opportunities. Comparing the number of shares being offered to the number of shares outstanding can give you a sense of how many more shares can be sold after the lock-up expires. The lock-up period (usually 180 days) bans insiders from selling their shares during a period of 6 months. After the lockup expires, insider shares may flood the market and put downward pressure to bear on the stock price.
The issuance of IPO and how retail investors can subscribe to it and what’s the process of allotment and refund is the purpose of this article.
Continuing The Conversation
Any company making a public issue of value of more than Rs.50 Lakhs is required to submit 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 in draft stage. The draft offer documents are filed with SEBI, atleast 21 days prior to the submission of the Offer Document with ROC/ SEs. SEBI may specifies changes, if any, in the draft Offer Document and the issuer or the Lead Merchant banker shall carry out these 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 time period of 21 days from the presentation of the Draft Offer Document with SEBI.
Offer document means Prospectus in case of a public issue or offer for sale which is filed Registrar of Companies (ROC) and Stock Exchanges. An offer document covers all the relevant information to assist an investor to make his/her investment decision.
Secondary stock offerings actually pertain to two things. First is the sale of additional stocks to the public by a company that has already issued its initial public offering (IPO). This is the most frequently accepted explanation of secondary stock offerings. Meanwhile, some institutions consider secondary offerings as the attempt to reduce the holding of major stockholder, promoters, underwriters, and large investors by selling the majority of stocks that they own. In this second scenario, all the funds would go to the investors who had already underwritten the company.
Red Herring Prospectus is a prospectus which doesn’t have details of either price or number of shares being offered or the number of issue. This means that in case price isn’t disclosed, the number of actions and the top and bottom price bands are disclosed. On the other hand, an issuer can state the issue size and the number of shares are determined later.
If you’re going through an IPO calendar at your net, you can press on the links of various companies and view the other details related to their IPO offer. For instance, information such as in which group a particular security belongs, issue price per share, face value per share, lower price limit, and upper price limit is listed in the calendar. The calendar might also provide information as to how many shares will be released and end date of the issue. All this information can serve to decide well in advance about certain points such as how many shares you can afford to purchase.
The only drawback of IPO calendars is that there’s no guarantee about the information in it. These calendars are compiled unofficially by stock market experts. Although most of the time the information provided in IPO calendars is accurate, there is a chance that not all of the information comes out to be correct. So, if you’re using an IPO calendar to take investment decisions, make certain that you also try to obtain information from other sources.
These documents are prepared by an independent specialized agency called Merchant Banker. This 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 amount they would like to bid at. Only the retail investors have the opportunity to bid at cut-off. After the bidding process is complete, the cut off price is arrived.
Important things to be looked at into the prospectus would include, Risk factors which are unique to the company, there can be many risk factors related to industry as a whole which may influence all the players in the industry in similar fashion, but the factors more specific to the company e.g. some prior tax benefits in a region where its plant is located coming to an end, some arrangement with major customer of supplier coming to end etc. should be looked at in detail.
Any individual having a demat account can apply to the IPO. As per SEBI guidelines a retail investor can apply or bid for shares for a value of not more than Rs. 1, 00, 000. In book build offer 35% of the issued shares are reserved for retail investors.
An investor can obtain the claim form to participate in an IPO from any collection centers, brokers or stock exchanges Public issues is open for at least three working days and not more than 10 working days.
In case of fixed price issue, the investor is intimated about the allotment or refund order within 30 days of the closure of the issue, in case of book built issue this process takes 15 working days.
The investor has the right to receive a Confirmatory Allotment Note (CAN) in case he has been allotted shares within 15 days from the closure of a book built issue. The registrar has to guarantee that the demat credit or refund as applicable is completed within 15 days of the closure of the issue. The listing on the stock exchanges is done within 7 days from the completion of the issue. In case of fixed price issue, listing would be around 37 days after the closure of the issue.
In case, applicant isn’t allotted any shares in the IPO or he gets less shares than originally applied he is authorized to get refund. From January 2006, SEBI has initiated ECS facility to speed up the refund process. ECS facility is available only at 15 centers, as of now. Investors residing in other centers will continue to get refunds through registered or ordinary post. Investor must note that the refund orders will be published on bank accounts which is stated in your demat account.