As we mentioned above, when a company needs funds to grow, it approaches the public
for funds. It offers shares in the company to the investing public in exchange for
cash. In short, the management relinquishes some part of the ownerships to investors,
who become part-owners of the company.
There are several processes involved in the IPO. The company appoints underwriters
to sell stock to the public, gets registration from the Securities & Exchange Board
of India (SEBI) and organises roadshows to sell the IPO to the public. After that,
the IPO is thrown open to investors. After the issue closes, the stock gets listed
on stock exchanges like the Bombay Stock Exchange and the National Stock Exchange,
where it can be freely bought and sold.
IPO shares are reserved for specific categories of investors like high net-worth
individuals and qualified institutional buyers. After allotment, the investors are
free to sell the shares and make any profit if there is price appreciation.
IPOs are not just for equity alone. Companies can issue IPOs for non-convertible
debentures and bonds as well. These are other ways in which companies can raise
money from the public without relinquishing any control of the ownership.’
From the pricing perspective, IPOs can be divided into two – fixed price issue and
book built issue. In a fixed price issue, the company that is coming out with an
IPO sets the IPOO price beforehand, and this is mentioned in the prospectus. In
a book-built issue, no price is fixed previously. Instead, it is decided upon according
to investors’ demand. Investors have to bid within a price band, and the difference
between the floor and ceiling of the band should not be more than 20 percent.
Another concept you need to understand while opening an IPO account is the lock-in
period. This is the period before which underwriters and company insiders are prohibited
from selling shares in the secondary market. The timeframe ranges from a few days
or a couple of years.
Prices of the stock can fall sharply when insiders and underwriters sell the stock,
so this is something you should keep in mind.