IPO – Process, How to buy Shares, Risks and Returns

 An IPO or Initial Public Offering is the process for private companies to go public by selling and making their stocks available to the general public. This is done by getting listed on an exchange. The process of an IPO is open to all companies new and old.

1. Introduction

With the help of an IPO, companies are able to raise equity capital by issuing shares to the general public. This can also be done by selling off the shares of the existing shareholders without raising any new capital. A company that offers shares to the public is in no way obligated to repay the capital to the investors (public). The company offering its shares is referred to as the issuer. The issuing of shares is done with the help of investment banks. Once the IPO is done, the shares of the company are traded in the open market. These shares can then be further sold by investors through tradings in the secondary market.

2. What is the need for an IPO?

IPO is an avenue through which companies can access capital and grow. The main objective of an IPO is to raise money by borrowing through the issuing of shares to the public. This is known as the first public invitation in the stock markets and hence the name IPO. Buying these shares allows the investor an ownership in the company in accordance with the value of the shares owned.

3. The process of an IPO in India

a. In India, it is the Securities and Exchange Board (SEBI) that regulates the process of an IPO and companies hoping to issue shares through an IPO have to first register with SEBI

b. A company must submit the necessary documents with the SEBI which then is analysed and is approved only when the SEBI is convinced

c. While SEBI evaluates the application, the company is required to prepare its prospectus, stating that the approval from SEBI is pending

d. On getting the approval from SEBI, the company is required to determine the share price of the shares to be issued and disclose the number of shares it plans to issue

e. The company must decide between the two types of IPO issues

i. Fixed Price IPO is one where the company decides in advance the price of the shares

ii. Book Building IPO is where the company provides a range of prices and there is a bid for shares within that price range

f. The shares are made public once the company decides the type of IPO they want to go with. The interested investors submit their applications and once the company receives the subscriptions from the public, it allots the shares

g. The company now lists the shares on the stock market and post the issuance in the primary market, it gets listed in the secondary market. These are then open for trading on a daily business.

4. How to Buy Shares from an IPO?

Step 1: You may acquire the physical application form from a broker or a distributor or a bank branch. The same can be accessed online

Step 2: You can then fill the form with your details, both personal and bank and demat account related

Step 3: Provide your total investment amount

Step 4: The shares will be allotted within 10 days from the date of closing (of the offer)

5. Important considerations before an IPO subscription

It is important to know of the market dynamic before investing in shares. Read the prospectus issued by the company and go throughout the financial details. These will shed light on the amount of money the company intends to raise and the types of shares they plan to issue. It is wise to also understand how the company plans to use the money raised from the IPO and its expansion plans. All these will help an investor make an informed decision.

6. The Risk and Reward

When you subscribe to a share during an IPO, you become one of the first shareholders of the company. As the company flourishes, the share price will rise and you will stand to profit. But there is also the risk of the stock markets. The returns on your investment will depend on the growth potential of the company and if the company fails, you will risk losing your money. Particularly in the case of unlisted companies, one has to be very careful as these companies are not required to publish their financials and thus, you can’t analyze their past performance.

IPO investments carry the risk of market fluctuations and must be undertaken after careful consideration. If you are unsure about investing, visit ClearTax where we have a list of handpicked investment options for you to pick from.