What are IPOs?  Definition, Types, How IPO Works, Investing in IPOs, Advantages & Disadvantages

Table of Contents:

  • What Is an IPO
  • Types Of IPOs
  • How IPO Works
  • Investing in IPOs
  • Advantages and Disadvantages of IPO

Rohit is a young BBA final year student; he loves to keep himself abreast with the latest developments in the corporate world. Recently when a popular mobile wallet platform announced its IPO, Rohit got curious to know what are IPOs and what’s their use. So, he started scrolling the net to dig deeper into the world of IPOs. Like Rohit, everyone has heard about IPOs. This page gives you a complete idea about what are IPOs and how to invest in them.

What is an IPO

Initial Public Offering abbreviated as IPO is a process of offering the shares of a private corporation to the public which includes both Institutional Investors and Retail investors in a new stock issuance in a primary market. This is the process of the transition of a privately held organization into a public company. It helps the company to raise capital through its various business operations. Post-IPO the shares get listed in the stock exchange and can be traded in the secondary market as well.

However not all privately held companies can offer IPOs. Any company that wants to hold an IPO must meet the requirements of exchanges and the Securities and Exchange Commission.

Types Of IPOs

IPOs are generally of 2 kinds

  • Fixed Price IPOs where the company fixes the issue price at which the initial sale of the share offering is done
  • Book Building Offer where a price band is offered, the lowest share price is called the Floor Price and the highest share price is called the CAP price.

How IPOs works

Before the IPO the company is usually a privately held organization with a small number of investors which may be family members, venture capitalists, and angel investors. The company which decides to go for IPOs generally reaches a considerable growth level when it decides that it can go public. The company must fulfill certain criteria to offer IPOs. For Indian companies these are

  • The paid-up capital of the company must be Rs 10 crores
  • Capitalization of the company must not be less than Rs 25 Crores
  • The company must have tangible assets of 3 crores for the previous 3 years
  • The average operating profit for the last 3 years must be at least 15 crores
  • The existing paid-up capital of the company must be fully paid or forfeited
  • The company must provide its annual reports for the last 3 financial years to NSE
  • It has no winding-up petition filed in any court
  • The Promoters/Directors/Selling Shareholders do not have any disciplinary action taken against them by SEBI

Once the company is able to meet all the statutory and regulatory requirements and is ready to go public IPO shares of a company are priced through underwriting due diligence the previously owned private share ownership converts to public ownership, and the existing private shareholders’ shares become worth the public trading price.

Investing in IPOs

Once you have decided to invest in an IPO of any company with the help of an expert or your investment manager who can understand the Red Herring of the company on your behalf then you arrange for funding. The funds could be arranged through your savings or through IPO financing. The next step is to get the DMAT account, which can be easily opened with any regularized bank. It is generally a paperless process. Apart from a DMAT account, you must have a Bank Account a Trading Account and a UPI id, and a valid PAN card. You must link your DMAT account with your bank account. Besides this, you must be an approved investor by SEBI.

There are three ways to apply for an IPO

  • Online through Internet Banking: If you are applying through a bank, you need an Internet banking id and password for that. The facility of applying for IPO is usually available under the e-service tab. Generally, it involves following steps
  • Log in to your internet banking
  • Go to the Request Tab and select IPO/Right Issue
  • From the visible list select the IPO you want to apply for and click on Apply
  • In the application form fill in the desired details which Include Your Name, Date of Birth, PAN Number, Bank Account Number, Nationality, Number of shares you want to bid and bidding price etc.
  • The final step involves confirming the amount to be blocked from the account. Confirming requisite terms and conditions and submitting the form.
  • Applying Through UPI : Applying for an IPO through UPI id is also easy. It involves a few simple steps.
  • Log in to your trading account and select the IPO you want to invest in.
  • Enter the price at which you want to bid
  • Provide your UPI ID and complete the application form
  • Finally, approve the block funds request by the UPI app
  • Through a broker: If you wish to apply for an IPO through a broker firm, you need to have an account with the broker. The investment can be done using the following steps:
  • Log in to your broker account by filling up id details
  • From the Portfolio menu select the IPO option
  • Enter the UPI id linked to your bank account
  • Place your bid
  • Click on the check box that you have read the RHP and other documents
  • Accept the mandate request on your UPI app
  • Offline/Physically by filling up the IPO Application form: If you want to apply for I{O offline that you need to visit your bank.
  • Request the ASBA application form
  • Fill in the desired details in the form
  • Submit the duly filled application form and ask for an acknowledgment slip
  • Use the reference number on the acknowledgment slip for your ASBA status
  • Submit the application to invest in the IPO of your choice. Mention the number of shares and bidding price.
  • Ensure the sufficient funds in your bank account
  • Bank first blocks the desired amount in your account and then sends the IPO application to the desired stock exchange.

Advantages and Disadvantages of IPO

The primary objective of an IPO is to raise capital for the business. It has both positive and flip sides to it.

Advantages For Company

  • Raising Funds: Company gets access to investment from the public to raise capital
  • Liquidity: IPO gives the great advantage of liquidity to all the stakeholders. Along with promoters all the shareholders like angel investors, PE firms and employees can cash out their stake
  • Improved Finance The overall finances of the company gets better as the valuation of the publicly traded company is generally higher than the privately held company. The company also escapes from the huge amount of debt in the process of going IPO-route
  • Increased visibility: reach of an IPO is huge, generally it reaches to the entire country. There is lots of coverage when an IPO is going to be launched resulting in a considerable increase in the visibility of the company.

Advantages For Investors

Two main advantages of Investing in IPO for the general public or retail investors are:

  • Investing in the right IPO can lead to great monetary profits. People have turned millionaires by just investing judiciously in good IPOs
  • An individual holding publicly traded shares of a company can use them as collateral for loans etc. They can easily be pledged to financial institutions as they can easily be traded in the stock exchange

Disadvantages For Company

  • IPOs are expensive and the cost of maintaining a public company is different from maintaining a private business
  • Fluctuation in share prices may affect management in a negative manner too.
  • Loss of control and stronger agency problems

Disadvantages For Investors

  • Investing in an IPO need a great amount of research, as there is a lack of early information and resources to know about the company and its financial health.
  • Privacy is another limitation. The company may ask you to provide lots of personal information and paperwork
  • Investing in an IPO can be a huge risk if the IPO doesn’t perform well. Recently investors incurred huge losses by investing in the IPO of a company that owns a very popular mobile wallet.

What is SME IPO, how it works, and how to invest in them?

Table of Contents:

  • What is SME-IPO
  • The Platforms
  • How it works
  • Difference from regular IPO
  • Investing in SME-IPO

Once Rohit got to know about IPO he became curious that IPOs are meant for somewhat established and financially sound organizations, they are expensive as well. The Small and Medium Enterprises sector is one of the biggest contributors to the growth of the continent’s economic growth. It contributes to 37.54% of the total GDP of India. The Government of India has also come up with several policy initiatives like Skill India, Pradhan Mantri MUDRA Yojna, Make in India, etc to support the sector. But the sector still struggles for self-financing. If they can’t fulfill the criteria of launching an IPO, how do small and mid-sized organizations raise funds for their capital?

The answer to this is SME-IPOs. Small and Mid-sized organizations can also launch an IPO, although they have different criteria to be fulfilled and different platforms to do so.

What is SME-IPO

SME-IPO means Initial Public Offering for Small and Mid-sized Businesses. With SME-IPOs the small and mid-sized firms can directly tap the public markets through trading and exchange of shares. The process and platform of launching an SME-IPO are different from the regular IPO.

The Platforms

In 2012 two separate platforms were launched to support the financing process of the SME sector. Bombay Stock Exchange offers a platform called BSE-SME and the National Stock Exchange offers a platform called Emerge.  Stock Exchange Bureau Of India (SEBI) issued several guidelines for the listing of shares for SMEs and both the platforms also have their own criteria that need to be fulfilled to list the shares with them.

How it works

SME Companies looking to raise the capital through SME IPOs need to enlist themselves with one of the platforms BSE-SME or NSE-Emerge. Both the stock exchanges have their own listing criteria

The Listing Criteria for BSE-SME

  • The company needs to be a public limited company
  • It should have its own website with financial statements of 3 years
  • company’s net worth in the latest audited financial results should be at least 3 crores.
  • Company’s post paid-up capital should be minimum of Rs. 3 crores and a Maximum of Rs 25 crores
  • It must enter into an agreement with both depositories and mandatorily facilitate DEMAT trading of securities
  • There should be no winding-up petition by the applicant company which has been admitted by the court.
  • The company has not been referred to BIFR( Board for Industrial and Financial Reconstruction).
  • Company must have a minimum of 50 allottees at the time of listing through IPO
  • The minimum lot size for trading and application is Rs. 1,00,000.

 

The Listing criteria for NSE-Emerge

  • The business should be registeres as a company under the Company act 1956 or Companies Act 2013
  • The company’s post paid-up capital should be less than Rs 25 crores.
  • It must have certified copies of the annual report for 3 years.
  • Distributable profits for at least two years out of the immediately preceding three years.
  • The promoters must have relevant experience of 3 years in the same field.
  • A business plan of 5 years along with balance sheets and profit and loss statements.
  • It must enter into an agreement with both depositories and mandatorily facilitate DEMAT trading of securities.
  • There should be no winding-up petition by the applicant company which has been admitted by the court.
  • If there is any litigation/criminal case filed against the applicant, promoter, or promoter-held companies then it must be disclosed along with the nature and status of the litigation.
  • A minimum of 50 allottees is needed by the company at the time of listing through IPO.

If the applicant company fulfills the above-stated criteria then he is eligible to launch SME-IPO. Once the company decides to go for IPO it must appoint a merchant banker who conducts the due diligence and documentation check of the company. The merchant banker checks all the financial documents shares issuances, IPO structure details of promoters, requisite government approvals, material contracts, etc. Once this is done then a draft prospectus and DHRP has to be submitted by the company in accordance with the SEBI guidelines. The concerned stock exchange verifies these documents and a site visit is conducted. It also conducts interviews of promoters with the listing committee. The merchant banker then files the prospectus with the ROC along with the opening and closing date of the issue. On its approval company intimates the exchange with the required documents and opening date of the issue. As per the schedule, the IPO will be opened and closed to the public for allotment.

Difference from Regular IPO

SME-IPOs are different from regular IPOs in many aspects. The platforms, financial status, and many other requirements are different from the mainline IPO.

  • The norms for mainline IPO are very stringent while for SME-IPO these are comparatively relaxed.
  • The post-paid-up capital of the company in regular IPO must be equal to or exceed 10 crore rupees while for SME-IPO it should be between 3 crores to 25 crores.
  • The Minimum number of allottees for SME-IPO is 50 while for regular IPO it is 1000.
  • IPO-Underwriting for SME-IPO is mandatory while for mainline IPO it is non-mandatory
  • Platforms for launching these IPOs are also different mainline IPO is listed with BSE and NSE while SME-IPO is with BSE-SME or NSE-Emerge.

Investing in SME-IPO

SME shares can be purchased and sold like mainline IPOs with few differences like they can be traded from SME exclusive platforms and they are traded in lots instead of numbers which is 100-1000 depending on the price of the share.

Startup IPOs: What are startups, startup IPOs, Benefits, and Caution before going for IPO

Table of Contents:

  • What are startups
  • Startup funding methods and stages
  • Startup IPOs
  • Benefits of IPO Launch
  • Caution before going for IPO

Rohit and our readers have a clear understanding of IPOS by now but there is another term that makes a lot of buzz in financial markets and that is Startup IPOs. After newly founded companies like Nykaa, Zomato, PolicyBazaar, and PayTm launched their public issues one after another. 2021 was the year when the maximum number of startups headed the IPO way. Before understanding startup IPOs it is essential to understand what are startups.

 

What are startups

The general perception is that any small and new business is a startup, but that is not true. Only a handful of newly started businesses come under the startup category. Although there is no clear-cut marking about which company would be counted as a startup generally these are new hi-tech businesses leveraging technology in order to provide some unique or different services or perform a current task in a new way. Like Paytm has revolutionized the way payments used to be done earlier.

Startup funding method and stages

 

Startups require funds to manage their business. These funds are acquired through various funding methods, which are:

  • Venture capitalist
  • Crowdfunding
  • Private investors
  • Bank loans
  • Personal Credit

It is when a startup reaches the value of $1 billion it is called a ‘Unicorn Company’

The startup goes through different stages of funding to grow and take its business to a certain level. These stages are

  • Pre-seed funding Funding or bootstrapping is when the company uses its own resources, founders invest their own money to scale the startup
  • Seed Funding is the stage when family, friends, and angel investors who believe in business idea invest funds in the company.
  • Series A funding: This is the first round when venture capitalists invest in the firm. This is the stage when founders should have a detailed plan and strategy to grow their ideas to generate long-term profits.
  • Series B Round funding: The series B funding stage allows startups to grow so that they can meet the various demands of their customers and also compete in tight markets in terms of competition.
  • Series C round funding: This round is done to scale up the businesses substantially by acquiring other startups. Many hedge funds, investment banks, private equity firms etc. will happily invest in your startup during the Series C stage.
  • Series D funding : A startup that has reached a certain value but still not decided about launching an IPO uses this round of funding. The Series D funding offers startups the most viable solutions allowing them to negotiate issues head-on by acquiring another startup as a merger.
  • IPO: When the company decides to raise funds from the common public

Startup IPOs

When the startup decides to generate funds from the common public it offers corporate shares which are made available for purchase and sale through the registered stock exchange. This process of going for public participation in generating funds is called Startup IPO. To launch an IPO the company has to follow a set of steps which are

  • Formation of an external team of experts which includes underwriters, lawyers, certified public accountants, and SEC experts.
  • Compilation of the startup’s Information including its financial performance as well as its expected future operations
  • Audit of the startup’s financial statements takes place which generates an opinion about its public offering.
  • The startup files its prospectus with the SEC and determines a specific date for going public.

 

Benefits of IPO Launch

  • This is the best way to generate a huge sum of funds
  • Once the startup turns into a public company it is easier to raise more funds through secondary offerings
  • Easier to retain employees by offering them stocks of a public company and also to attract new talent
  • Mergers are easier for a public organization as it can utilize its public shares to acquire another startup.

Word Of Caution

It is not easy to launch an IPO. It is an expensive process. Also, the company needs to be well prepared in terms of numbers as it has to prove itself credible to the country’s top stock exchanges. Recently even SEBI has brought tougher proposals to launch IPO which are soon to become mandatory guidelines for startups to follow before going public. These proposals are present in public domain.