Initial Public Offering or IPO is a process of offering shares of privately owned company to public to make it publicly traded company by registrating on the stock exchange.
Transition from private to public company is done by offering ownership to public by the means of shares. In this process, fresh stock of shares of company is offered.
Explanation of initial public offering or IPO and primary Securities market
Primary Securities market is the market where new stock of shares is sold or bought. IPO is a fresh stock so it is traded in the primary market.
If a person wants to sell his or her shares bought as IPO in the market, he or she needs to sell to other traders in the secondary securities market instead of primary.
By the means of IPO, privately owned company can raise funds from public to expand its business and realize full potential of theirs investment.
Initial Public Offering or IPO Vs private placement
Selling shares to pre-selected investors like wealthy traders, investment banks, and other financial institutions, instead to offer in public like IPO is called private placement.
Actually, if a privately owned company doesn’t want to face the complicated process of offering IPOs, and wants to raise funds without regulations, it chooses to sell shares of company to some selected investors. Private placement is a part of primary Securities market as it sells fresh stock of shares.
To issue IPOs, company needs to take permission from securities and exchange boards or commission, and follow conditions set by apex regulatory authority.
Only after fulfilling all the conditions, company can go for issue to the public not only for pre-selected investors like private placement.
Importance of issuing IPOs
IPO is a means private company decides to choose to raise funds from public or market. As usual, company needs capital to ensure smooth functioning and to expand business activities. By this way, hidden or dormant potential of investment of owners can be realized.
By selling bonds and debentures or taking loan on market rates can’t be wise strategy as it will increase the burden of operating cost. Hence, it may plug the company’s future prospect to be competitive. This is why IPO offers best means.
Process of offering initial public offering or IPO
Actually, process of offering IPOs is a lengthy and complicated process from selecting an intermediary as underwriter or investment bank to the allotment of shares to the subscribers at the end.
In the process, company has to go through each stage by the help of advice by experts. Nowadays,any IPO issuing news captures heading of business daily.
Understanding the process of offering IPO
The process of offering IPO is a complicated and lengthy process one has to follow before to allocate shares. Steps of process of offering IPOs including role of underwriter or intermediary to help company to raise capital, registration of IPOs, securities and exchange commission verification and approval, application to stock exchange, advertising, pricing of IPOs and allotment of shares at the end. So, let’s see in detail the process of offering IPO.
1.What is underwriter?
Underwriter is a financial expert or investment bank whose role is to assess the company fundamentals and assures company to raise funds company aspires. Simply put, underwriter is a intermediary between company going to issue IPOs and investors. This is a first step of offering process.
2.Registration of initial public offering or IPO
As per the company act, owner in process of offering IPOs must disclose each and every aspect of company regarding description of company, details of financials, capital they are raising, purpose of IPOs, risk factors, etc. And, such statement need to submitted to the registrar of the companies as per the rules and regulations of securities and exchange commission as well as companies act.
3.Verification and approval by securities and exchange commission
Details submitted by company is subject to verification by the apex regulatory authority like (SEBI). After verification, authority grants approval for IPOs on conditions that company followed conditions set by authority. But, if SEBI rejects the facts provided by company, it has to compile what authority demands.
Once the approval is granted by SEBI for the submitted facts of company, company can makes application to the stock exchange to issue IPOs.
4.Spreading public awareness by advertising the promising prospect of IPOs
When the company gets permission after fulfilling all the conditions, it is expected to make advertising about the nature of the IPO company issuing. Company official, management make everything to ensure that their IPO get better response. They takes help from fund managers, market analysts, brokers, and wealthy investors to get better result.
5.IPO price determination by company
There are two ways by which company sets the price for IPOs they issuing.
- Fixed Price
- Book binding offering
In case of fixed Price, company decides a fix price of shares in advance and there is no bargain or bidding accepted from investors.
Second process of setting price is book binding offering which includes certain price bands like 10 or 20 percent. Interested investors offers theirs bidding for shares and highest bidders avail the shares of company.
6.Subscribing IPO
In this way, investors could subscribe the offered IPOs and, finally, the company initiates the process of allotment of shares to each investor.
To prescribe IPOs, person or individuals need Demat account so that shares are put in that account.
This all about the initial public offering or IPO and process of offering IPO prescribed by apex regulatory authorities. The process may be slightly differ from nation to nation but the basic structure is same.
Summary of initial public offering or IPO
IPO is a process of offering shares of privately owned company to public to make it publicly traded company.
IPO is a fresh stock so it is traded in the primary marke. Because, primary Securities market is the market in which new stock of shares is sold or bought.
It is well known means to raise funds, potential and increase scope of company.
But, selling shares to pre-selected investors like wealthy traders, investment banks, and other financial institutions, instead to offer in public like IPO is called private placement.
First of all, company needs to take permission from securities and exchange boards or commission.
Steps of process of offering IPOs including role of underwriter or intermediary to help company to raise capital, registration of IPOs, securities and exchange commission verification and approval, application to stock exchange, advertising, pricing of IPOs and allotment of shares at last.
Solved questions on initial public offering or IPO
Here are some useful questions to bring more clarity of topic. Just take a look.
Q. 1. What does IPOs mean?
Ans: Process of offering shares of privately owned company to public to make it publicly traded company.
Its purpose is to raise funds because by selling bonds and debentures or taking loan on market rates can’t be wise strategy as it will increase the burden of operating cost.
Q. 2. What is private placement?
Ans: Private placement is if a privately owned company doesn’t want to face the complicated process of offering IPOs, and wants to raise funds without regulations, it chooses to sell shares of company to some selected investors.
Q. 3. What is underwriter and his role?
Ans: He is a financial expert or investment bank whose role is to assess the company fundamentals and assures company to raise funds company aspires.
Q. 4. What are the steps in offering IPOs?
Ans: 1.Role of underwriter or intermediary to help company to raise capital,
2.Registration of IPOs, securities and exchange commission verification and approval,
3.Application to stock exchange,
4.Advertising,
5.Pricing of IPOs and
6.Allotment of shares at last.
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Primary and secondary securities
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