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An IPO is a process by which a company offers its shares to the general public for the first time. It is a long process. IPO financing offers required funds for the growth of companies and adds to their market value also. After completing the IPO process, the private company changes its status to a publicly-traded company. Its shares can be traded on formal stock exchanges after the lock-in period for IPO shares.
IPO Process Steps
- The hiring of financial experts like an Underwriter or Investment Bank: They assure the IPO company about the funds being raised based on the crucial financial parameters. They also act as intermediaries between the IPO company and investors.
- Registration: Here, the company prepares a registration statement called the Draft Red Herring Prospectus (DRHP) and submits it to the SEBI. The company needs to submit all compulsory disclosures according to the SEBI. It involves the risk factors involved in the IPO, use of IPO Proceeds, Industry and business description, and management details.
- Verification by SEBI
Then SEBI verifies the submitted statements for the facts disclosed by the company. If it is approved by SEBI, the company can declare the IPO issue date.
- Application to the stock exchange
The company makes an application to the stock exchange so that it can float its initial issue in the secondary market after IPO process.
- Creating a Buzz for IPO
For successful IPO financing, the company creates a buzz for their impending IPO in the market. This is a tactic to attract potential investors by key highlights, including business analysts and management details.
- IPO Pricing
The company can follow the Fixed Price IPO process, where the IPO share price is announced in advance or the Book Binding process, where a price bracket is given to make a bid by the investors. In the case of Fixed Price Offering, the price of the company’s stocks is announced in advance.
- Allotment of IPO shares
Once the IPO applications are closed, the company allot shares to investors. It can be oversubscribed or undersubscribed. Investors get their IPO share in their Demat account.
SEBI’s New Rule for IPO Process
While a company proposes IPO documents to the SEBI, it looks at numerous aspects of a company to give the nod to its IPO. Companies disclose EPS (earnings per share), P/E (price to earnings, NAV (net asset value), and their accounting ratios to compare with their peers. Now they need to disclose their positions in the market concerning non-traditional parameters such as key performance indicators (KPIs) and valuation based on past fund-raising. New-age startups need to disclose valuations as per the new issue and acquisitions during the past 18 months for a clear picture of their financials. These new parameters aid investors in making informed investment decisions. Open a trading account with your demat account and gain from IPO investments.
Be an informed Investors: High-priced and Oversubscribed IPO.
Investors should weigh the benefits and risks before investing in an IPO to make informed decisions. Read the prospectus carefully as it is a great source to understand the risks and growth prospects of the company. Other than that, consider company financials and fundamentals.
If it is an oversubscribed IPO that will allow only a few shares to a lower number of retail investors, it may not be worth the effort. Therefore, retail investors can skip high-priced IPOs.
You can apply online for an IPO using a Demat account. To increase the chances of IPO allotment, you can use different Demat Accounts linked to different PANs. Investors may not get any benefit from big IPO applications as all retail applications less than two lakhs are treated equally. It is better to use multiple accounts strategy.