IPO stands for Initial Public Offering (IPO) which means when a Company sells their shares to the public for the first time called Initial Public Offering (IPO). This is also known as 'Go Public' because the first time a company goes to the public to raise funds and get listed on stock exchanges.
Companies, who sell its shares to the public for the first time, get funds from the investors and get listed to the stock exchanges and investors become a shareholder of that company or a partner proportion to the shares they hold.
Why does a company Issue IPO?
If a company wants to grow its business then a company has some option to choose like it can use its own cash, borrow money from lenders and take money on debt, or it can issue an IPO and sell to the public. It may be possible that company does not have sufficient cash in hand to invest for its growth and company does not want additional burden in form of debt and it is also not advisable or wise decision to make money on debt if the company has another option too.
So the main reason to issue an IPO is raising funds that can be used for its Expansion, re-investing in the company's infrastructure or to reduce Debt, or to add new service etc.
However, we can get all important information in details about any IPO issuing company in its RED Herring prospectus like its Business details, Capital information, plan and strategy, Promoters and Management details and the reason why the company wants to raise funds through IPO.
RED Herring Prospectus can be found on sebi.co.in
"In a simple word a company issues an IPO to raise fund so that it can pursue its growth plans and strategy".
Types of IPO
There are two types of IPO, Fixed Price issue and Book building issue.
(1). Fixed Price issue
In Fixed price issue, the company decide a fixed price with the help of an investment bank and offer to the investor to subscribe the IPO at the same price.
For Example: If a company set the price of per share is 50 then the investor has to subscribe the IPO at the fixed price of 50.
(2). Book building issue
In Book building Price Issue, Company decide a price band for it shares with the help of Investment bank and investors have to submit the Bid within the price band decided by company and investment bank and there are lowest and the highest share prices and the lower price is called floor price and highest price is called Cap price. The difference between Floor Price and Cap price can go maximum to 20%. Final price is decided after the bidding process gets completed.
# If Any IPO is fixed price issue then you will have to apply on the fixed price.
# If any IPO is Book Building issue then you can bid at any price between the bid range.
Types of Investors in IPO
It is not guaranteed that if you have applied for the IPO then you will get it for sure. For that there is allotment process.
In IPO basically three types of investors invest the money.
1. (QIB) Qualified institutional Buyers
QIB's are basically organizations or investing institutional who collect money from various investors and invest into the market.
For example: Mutual funds, Pension funds, Provident funds, Foreign Venture capital investors, Foreign institutional investor etc.
Maximum 50% of total issues shares can be reserved for QIB's
2. (NII) Non Institutional Investors or (HNI) High Networth Individual
Individual investors, NRI's, companies, trusts etc who bid for more then Rs 2 lakhs are known as Non-institutional bidders. NII's are also known as HNI If retail investor applies more then Rs 2,00,000 /- of shares in an IPO.
15% of shares of the total issue size in Book Build IPO's are reserved for NII's.
3. Retail Investor
Retail investors are individuals who bid or invest for less than 2,00,00 0/- in IPO.
35% of shares of the total issue size in Book Build IPO's are reserved for Retail Investor.
# In Fixed price issue, 50 % of the shares offered are reserved for applications below Rs. 2 lakh and the balance for higher amount applications.
# In Book building : 50 % of shares offered are reserved for QIBS, 35 % for Non Retail and 15% for Retail Investors.
IPO Allotment Process
The allocation of shares to investor is reserved as per their categories in IPO and the company who issue IPO decide a lot size for IPO that mean investors have to buy shares in lots they can not buy any numbers of shares they want.
For example if Any xyz company decides the price of one share is 1000 and size of one lot is equal to 15 shares in case of Fixed Price Issue IPO then the value of one lot is 15*1000 that is 15,000/-. Now investors can apply for IPO as per their category they fall in.
Most of the time IPO gets oversubscribed and when an issue is over-subscribed, the applicants get fewer shares than what they have applied for.
Allotment process for all categories
IPO Allotment to Qualified Institutional Buyers
In case of QIBs, Shares are allotted proportionately to the applicants. So, if the shares are oversubscribed by 4 times, then an application of 1,00,000 shares will receive only 25,000 shares.
IPO Allotment to Retail Investors
As per the process maximum amount for which a retail investor can apply for single IPO is 2 lac.
If the number of applications is more than the number of shares offered, the maximum Retail Investors who are eligible for the allotment will get at least one lot and rest will be distributed proportion to their bid size.
For example if a company has total numbers of shares are 10,00,000/- and the 35% shares are reserved for Retail Investors so the total share to be allotted are 3,50,000/and if the size of one lot is 14 then total numbers of lots are 25000.
And now if there are 25000 applicant each applied for one lot then everyone will get one lot but if the applicant increase by some then everyone will get at least one lot and then other who applied more than one lot will receive the lots or shares proportion to their order size.
And If the number of applicant increase by more than that not even a single lot can be allotted to each applicant in this case allotment happens by the lucky draw.
"So allotment of the shares in IPO for retail investors are also depend on individual Fortune or luck."
IPO Allotment to NII and HNI
It is not necessary that a HNI or NII will be allotted the exact number of shares that they have applied for. If they have applied for 1,00,000 shares and the reserved quota is over subscribed by 10 times then they will get 1000 shares each. Basically shares are allotted proportionately to the applicants in case of over subscriptions.