Pocketful

Category: IPO

  • What is the IPO Cycle – Meaning, Processes and Different Stages

    What is the IPO Cycle – Meaning, Processes and Different Stages

    The process of going through an IPO is key for any private companies looking to raise funds and get listed on the stock markets. The IPO process is sometimes referred to as the IPO cycle. However, the IPO cycle is very complex and includes many processes that involve different regulations, financial disclosures, and compliance. Understanding the IPO cycle is a necessity not only for companies but also for potential investors when making investment decisions. 

    This blog provides an extensive overview of the IPO cycle, its stages, advantages, and potential drawbacks.

    What is an IPO?

    IPO, short for Initial Public Offering, refers to the process by which a private company issues or offers shares to the public and consequently becomes an entity listed on the stock exchange. The main reasons why companies go public include raising more capital that can be used for expansion, debt repayment, research, and development. By launching an IPO, a firm offers the general public an opportunity to become shareholders and become part of the future growth of the company in exchange for their investment. On the other hand, an IPO also gives early investors the chance to get their investments back.

    The process of an initial public offering consists of many sub-processes with clearly defined responsibilities of the company, underwriters, regulators, and stock exchanges. The company seeking to launch an IPO must disclose its financials, business operations, and risks in the form of a prospectus, which is reviewed and approved by regulatory authorities, ensuring compliance with applicable standards. This public disclosure would offer potential investors insights into a company’s operations, thus ensuring that they make informed investment decisions.

    What is the IPO cycle?

    The IPO cycle consists of all the stages ranging from when the firm first considers going public to getting listed on a stock exchange. Stages of the cycle include preparation of prospectus, regulatory filing, pricing, and listing. All of these stages are very important and must be undertaken in compliance with the regulatory standards.

    A well-structured IPO cycle ensures that it meets regulatory requirements and provides transparent disclosures to those investors who want to invest in it, establishing credibility and market value for the company before its shares hit the stock markets.

    Different Stages of IPO Cycle

    The IPO cycle consists of various stages, and all these stages are essential for a successful IPO. Let’s understand each stage in detail.

    Pre-IPO Stage or Preparation

    • Financial Data: The company assesses its financials to ensure that it meets all the accounting standards and is in good financial health to pass the regulatory tests. In this stage, auditor appointments and amendments in financial practices for transparency have been observed.
    • Restructuring: The company may restructure its business model by reducing debt, settling legal disputes, focusing on productive segments, or starting new ventures that would increase its attractiveness to investors before IPO.
    • Hiring of Underwriters: Underwriters can be investment banking companies. Underwriters are hired by the companies to look after the processes of an IPO. They take responsibility for determining company value, setting the IPO price, and getting investors to participate in the IPO.

    Regulatory Filing and Review: Draft Red Herring Prospectus or DRHP

    • Preparation of DRHP: The company prepares, in consultation with underwriters and legal counsel, a draft red herring prospectus or DRHP. A DRHP is a document consisting of information about the business, financial information, management, risks, and other important information.

    The DRHP document is submitted to the regulatory authority for approval. The regulator ensures that the information in the document complies with all the relevant regulations. In India, once the DRHP is approved by SEBI, it is finalized into the Red Herring Prospectus (RHP). RHP serves as an important document for investors when making decisions about whether to invest in an IPO or not. 

    Roadshow and Marketing

    • Roadshow Events: A roadshow is a series of presentations and meetings during which company representatives and underwriters pitch the opportunity to invest in the IPO to potential investors. This stage is important in building investor interest and garnering feedback.
    • Building Interest: This stage helps the company determine investor sentiment and adjust its IPO strategy if needed. Investor demand can significantly affect the IPO price and the number of shares to be issued.

    Pricing and Allocation

    • Determination of IPO Price: After the roadshow, the company and the underwriters determine a price for the shares issued in an IPO. The price is determined by the investor demand, market sentiment, and future growth potential of the company. Determining the optimal IPO price is, therefore, crucial because it affects the capital-raising activities of a company.
    • Allocation of the Shares: There are different categories of investors, each with a reserved quota in the IPO. If the IPO is not fully subscribed, each investor gets the number of shares one has applied for. On the other hand, if the IPO is oversubscribed, investors are allocated shares by lottery method. However, the minimum shares allotted and lock-in period vary across different investor categories.

    Listing on the Stock Exchange

    • Going Public: On the scheduled listing day, shares issued by the company are listed on the stock exchange, and the trading commences. Investors who didn’t get an allotment can buy shares or sell their allotted shares on this day, which can cause price fluctuations.
    • Post-IPO Stabilization: The lock-in period for anchor investors ensures the stock price gets some stability during the initial post-listing phase.

    Benefits of an IPO to a Company

    The benefits of launching an IPO for a company are:

    • Capital Raising: Companies, through an IPO, raise significant amounts of capital to expand the business, settle debts, or conduct research and development.
    • Public Profile and Credibility Increases: The IPO enhances the company’s profile and credibility, which helps attract talent, build customer trust, and create partnerships.
    • Liquidity to Early Investors: The IPO enables early investors to sell their shares in the open market. 
    • Expansion: Companies can acquire other businesses by using the funds raised from IPO and hence expand their market share.

    Drawbacks of Going Through an IPO Cycle

    The various disadvantages of going through an IPO cycle are:

    • Significant Costs: The process of launching an IPO is very expensive as it costs money to hire underwriters and legal consultants.
    • Regulatory Compliance/Restrictions: Public companies are required to follow strict regulations and report financials at regular intervals, which requires a dedicated accounting and compliance team, thus increasing operational costs.
    • Short-term Focus: Shareholders seek continual quarterly performance, thus creating short-term pressures and it may inhibit the long-term objectives of the company.
    • Loss of Control: Owners may lose some control over the decisions of the firm due to the influence of other shareholders.
    • Market Volatility: Stock prices can experience market fluctuations, which impacts the company’s market capitalization and investor sentiment.

    Conclusion

    The IPO cycle is a complex but very rewarding process by which companies raise money from the general public and get listed on the stock exchange. However, the process is cumbersome and involves many sub-processes, ranging from the decision to launch an IPO to seeing its share trading on the stock exchange. It can take anywhere between 3 months to 12 months to get through the IPO cycle, based on company preparedness, regulatory processes, and market conditions. Companies should thoroughly compare the benefits and challenges involved in the IPO cycle before going through the IPO cycle.

    Frequently Asked Questions (FAQs)

    1. What is an IPO cycle?

      The IPO cycle is the step-by-step procedure a private company has to adopt to become a publicly listed company. The IPO cycle involves the preparation of documents, regulatory filing, pricing and listing.

    2. Why do companies go through the IPO cycle?

      Companies opt for an IPO to raise funds, gain more visibility and ensure liquidity for their early investors. The funds can support future growth and expansion in the days to come.

    3. Is a Demat account required to invest in IPOs?

      Investors need to have a Demat account to invest in an IPO, as it will store the shares allotted to the investors.

    4. What are the main phases of the IPO cycle?

      The primary phases of an IPO cycle include pre-IPO preparation, regulatory filing, road show, pricing, and listing on the stock exchange.

    5. Are there any disadvantages of going through an IPO cycle?

      Launching an IPO can be expensive due to the costs involved in hiring underwriters, preparing marketing materials, and meeting higher regulatory requirements.

  • What is Face Value in an IPO?

    What is Face Value in an IPO?

    Investment in an IPO has been extremely popular among new investors entering into the stock market. In order to make good investment decisions and make consistent returns in the market, it is quintessential to know key terms associated with an IPO, such as “face value.” In an IPO, face value defines the original nominal value of each share. It is also known as par value.

    In this blog, we will explain face value in an IPO, how shares are sold at face value, and how to calculate face value, which will help you clearly understand the importance of face value while investing in an IPO.

    What is an IPO?

    An Initial Public Offering, or IPO, is the process through which a private company offers its shares to the public for the first time. Companies go public for one or more of these reasons: to raise funds to further grow the business, pay off some debt, or for other strategic purposes. The investors attempt to become partial owners of the company and have a chance to profit if the company continues performing well.

    The IPO shares are traded on the stock exchanges and, hence, accessible to the general public. To invest in an IPO, the investors would need a Demat account, which is an electronic account that lets investors hold and manage securities. For the companies, the process involves seeking regulatory approval and determining the issue price and the face value of shares with the help of investment banks.

    What is the Face Value of an IPO?

    Face value refers to the fixed base price assigned to every share of the company. Unlike the market price, which changes continuously after the IPO, face value is constant and reflects the base accounting value of a share.

    For instance, if there are 1,00,000 shares outstanding and the equity share capital of the company is INR 10,00,000, then the face value of the shares is calculated by dividing the equity share capital by the total number of outstanding shares. The face value of shares in the above example is equal to INR 10.

    Face value is different from the trading price of the share at a stock exchange. The trading price depends on market demand and the performance of a company; however, face value is a constant number used for accounting purposes and even for ascertaining dividends.

    How Shares are Sold at Face Value?

    In an IPO, the face value for the shares issued by the company is fixed at values such as INR 1, INR 10, etc. The price of the shares credited to the Demat account of the investors includes a premium over the face value, which is calculated by the underwriters based on the expected market demand, current market sentiment and the company’s past financial performance.

    Example of Face Value and Premium Pricing

    If the company has determined the face value of the share is fixed at INR 10 and the IPO price at INR 100. In this case, the difference between the face value, which is INR 10, and the IPO price, which is INR 100, is called the premium. The premium here is INR 90, which is decided by the company in collaboration with its advisors based on the demand for the company and valuation.

    This premium over face value will enable companies to raise adequate capital through the IPO. It is important for investors to understand that the face value itself is purely nominal, but the premium reflects market interest and the company’s expected growth potential.

    How to Find Face Value in an IPO?

    Even though the face value is pre-established by the company, the steps to calculate it are below. Investors can also readily access this information.

    • Check Prospectus: To issue shares through an IPO, the company must publish a prospectus. This prospectus includes all the critical financial information. It also contains information regarding the face value of shares, issue price, and so on.

    The face value can be obtained by dividing the total equity capital of a particular company by the outstanding shares.

    For Example: If equity capital is 100 crores and outstanding shares are 10 crores, then the face value would be INR 10 (100 crore/10 crore).

    • Financial Platforms and Stock Exchanges: Most financial platforms and stock exchanges publish the face value of IPO shares. 
    • Brokerage Websites: Most of the time, the details of the IPO, including the face value of the shares, are available on brokerage websites.

    Why does Face Value matter in an IPO?

    It is important for investors to understand the meaning of the face value of shares in an IPO due to the following reasons:

    • Dividend Calculation: Generally, dividends are declared based on the face value of the shares. For example, if a company declares a 10% dividend on a share with a face value of INR 10, then every share will get INR 1 as a dividend.
    • Stock Splits: In a stock split, companies divide the face value of its shares to make them affordable for more investors as the share price decreases. It also increases the number of shares available for trading in the market. For example, a company splits a share with a face value of INR 10 into two shares with a face value of INR 5 each. Suppose the current market price was INR 300. Then, after the stock split, the shares of the company will trade at INR 150.
    • Accounting Records: The face value is of much importance in accounting and is employed in the financial statement of a company to signify the original contribution of shareholders.

    How to Invest in an IPO with Knowledge of Face Value

    Investing in an IPO requires investors to have knowledge of face value when judging the pricing of the IPO. The face value can be used to evaluate the premium at which the IPO price is set. Favorable market sentiments could be reflected by a high premium, but the investors should ascertain if such a premium is justified by the strong financials and future growth prospects of the company.

    Read Also: What is DRHP (Draft Red Herring Prospectus)?

    Conclusion

    The face value of shares in an IPO is one of the most critical data that investors must understand. By understanding what is face value in an IPO, an individual can better assess dividends, stock splits, and financial statements. Even though the face value doesn’t influence the market price, it helps gain insight into the pricing of the company’s IPO. Armed with this knowledge, investors are better equipped to make informed investing decisions.

    Frequently Asked Questions

    1. What is the face value of an IPO?

      Face value is the nominal accounting value assigned by the issuing company to each share.

    2. Why is face value important in an IPO?

      Face value is important for judging the pricing of the IPO, calculation of dividends, and stock splits.

    3. Are shares sold at face value in an IPO?

      Usually, IPO shares are issued at a price that is more than their face value. The price of the shares issued in an IPO consists of a premium above the face value, reflecting market demand and future growth prospects of the company.

    4. What is the difference between face value and market value?

      The face value is fixed, while the market price fluctuates based on factors like market demand, the company’s financial performance, and market sentiment.

    5. How do I find the face value of a share in an IPO?

      Generally, you can get the face value from the company’s IPO prospectus, stock exchange platforms, or through the IPO details given on brokerage platforms.

  • Why Invest in an IPO and its Benefits?

    Why Invest in an IPO and its Benefits?

    Initial Public Offering (IPO) has long been one of the ways companies raise funds from the general public, but recently, many IPOs have been receiving extraordinary interest from investors. The rising popularity of IPOs is due to the various benefits they offer to investors.

    In this blog, we will explore the reasons why companies launch an IPO and the various benefits of investing in an IPO.

    What is an IPO?

    A firm that intends to be listed as a public company must first raise money via an IPO or initial public offering. The funds raised can be used for growth, repayment of debts, acquisition, etc. There are also situations when shares offered in an IPO are sold by the early-stage investors or the firm’s promoters. After the IPO, the shares of the company are listed on the stock exchange and can be traded.

    Why Do Companies Offer IPO?

    Companies choose initial public offerings (IPOs) for the following reasons:

    1. To raise capital: Businesses typically seek to raise funds for business expansion since they can use the funds to expand their operations.

    2. Debt Repayment: With the money raised, the company may pay off its current debt and improve its debt ratios, making this another reason for raising capital.

    3. New Opportunities: Businesses can use the funds to establish operations in overseas markets by exporting their goods and services.

    4. Research: Companies can use the money raised from the initial public offerings (IPOs) to improve the quality of their goods and services by developing new technologies. 

    5. Liquidity for Current Investors: Founders, venture capitalists, and early investors occasionally sell their ownership stake through an initial public offering (IPO) process and look for other investment opportunities.

    6. Acquisitions: Funds raised in an IPO can be used by the company to acquire other businesses.

    7. Increase in Popularity: A successful initial public offering (IPO) increases the popularity of the company among investors and its customers, which can result in higher sales and profits.


    Why Should You Consider Investing in an IPO?

    The primary reasons to consider investing in an IPO are as follows- 

    • Listing Gains – In an IPO, if the shares trade at a price higher than the offer price on the listing date, then the investors can sell their shares and realize substantial listing gains. 
    • Investment Opportunity – An IPO offers individuals a chance to invest in companies in their early stages.
    • Portfolio Diversification — If the company is operating in a different sector than the ones you are currently invested in, individuals can invest in IPOs of such companies and minimize their overall portfolio risk.
    • Potential Long-Term Growth — Companies with strong historical performance tend to have longer-term growth potential. Investors can judge the past performance of the company by using the data provided in the Red Herring Prospectus (RHP).
    • Lower Pricing – Some initial public offerings (IPOs) are intentionally issued at a lower price to attract more investors, making them an excellent investing opportunity for traders or investors.
    • Transparency – The annual reports and other documents of companies launching an IPO are subject to strict regulations, which makes them more transparent.
    • Liquidity – Once a firm makes its shares public, its shares can be easily bought and sold on the stock exchange.

    Benefits of Investing in IPO

    The major benefits of investing in an IPO are as follows:

    1. Immediate Gains: If the company opens at a price higher than the offer price, investors can choose to exit by selling the shares received and realizing substantial listing gains. There were several instances in the recent past when the shares offered in an IPO increased substantially as the investors who didn’t get the allocation tried to purchase it on the listing date.

    2. Flexibility: Investors can purchase and sell shares at any time without incurring high transaction costs in the stock market, as the company is publicly listed.

    3. Fair Opportunity: SEBI has several regulations in place to ensure that small investors have an equal opportunity to receive shares in an initial public offering (IPO). In case of an oversubscribed issue, a lottery system is used to allot IPO shares to the general public. However, if the IPO is not fully subscribed, each IPO applicant receives the number of shares they have applied for.

    4. Compliances: SEBI has established strict regulations for companies launching an IPO to safeguard individual investors. To allow investors to make an informed choice, the company’s prospectus must include all necessary information, such as performance, financials, growth, risks, and plans. 

    5. Purchase at a Discount: Companies can choose to offer their shares at a reduced price when they go public to attract more investors. Due to the initial low price, the shares typically list at a premium, which creates a positive image of the company and results in listing day gains for the investors. 

    6. Ownership: Investors who are allotted shares in an IPO are regarded as shareholders of the business and can cast their votes at the annual general meetings.

    7. Early Stage Opportunity: An initial public offering (IPO) allows investors to purchase stock of a company during its early stages. Some of these companies can become a major success in the future and deliver multi-bagger returns to their investors.

    8. Consistent Income: Several companies distribute dividends to their shareholders. Therefore, investing in these dividend-paying businesses allows you to generate a steady income. 

    Conclusion

    On a concluding note, you may be considering investing in an IPO the next time an opportunity comes across by reading the advantages mentioned above. However, keep in mind that an IPO’s performance solely depends on the subscription data of a particular IPO. Market sentiment on the listing date and several other factors also affect listing gains. To make an informed investment decision, one must conduct a thorough financial analysis, which includes evaluating the company’s historical performance, growth prospects, and reasons for raising funds. Before making any investing decisions, you, as an investor, must speak with your investment advisor.

    Frequently Asked Questions (FAQs)

    1. Why does the company launch an IPO?

      A corporation launches an initial public offering (IPO) to raise funds, which it might utilize for debt repayment, business expansion, and other purposes. 

    2. Is an IPO a good option for short-term or long-term investments?

      Shares allotted in an IPO can be kept for the long term as well as the short term, depending on the future growth prospects of the company. The holding period also depends on the investor’s goal; some may seek listing gains, while others hold it for long-term potential growth.

    3. Can I apply for an IPO without a Demat Account?

      Investors cannot apply for an IPO if they do not have a Demat account.

    4. How are the IPO’s issue prices determined?

      In a fixed price issue, the company’s underwriter sets the price at which the investors can purchase shares. In a book-building issue, the company announces a price range, and the investor bids within that range to determine the issue price.

    5. Is it right to invest in every Initial Public Offering (IPO)?

      No, it is not wise to participate in every initial public offering (IPO) since there may be instances where the company may be aggressively priced, and the IPO’s issue price may be too high. Instead, it is advised to research the company’s fundamentals before investing.

  • What is NII in IPO?

    What is NII in IPO?

    An IPO is an opportunity for a company to raise capital by offering shares to the general public for the very first time. Companies use the funds raised to expand, pay off debts or acquire other companies. In the world of IPOs, the investors are classified into anchor investors, retail investors, qualified institutional buyers, and non-institutional investors, all of which play an imperative role in making an IPO successful. 

    In this blog, we are going to discuss what NIIs are, categories of investors in the NII category, rules and regulations, key features of the NII category, and how investors impact IPO success. This information will allow you to make informed decisions for investment in IPOs, whether you are an experienced investor or new to the stock market.

    What is NII?

    The NII full form is Non-Institutional Investors. A retail investor invests relatively smaller amounts in an IPO, whereas NIIs are high net worth individuals or entities with the ability to invest large amounts of money, often higher than the minimum amount defined under the market regulations. Any individual, company, trust, or other entity except retail and institutional investors can be referred to as an NII.

    For example, in India, a company applying for more than INR 2 lakh in an IPO is considered an NII. NII quota in an IPO is equal to 15%, i.e., 15% of the shares offered in the IPO are reserved for NIIs. NIIs are different from QIBs as they are not SEBI registered. NIIs compete for the allocation of IPO shares in their category based on demand and supply in the NII segment of the IPO.

    Since the NIIs are sophisticated investors, their participation in an IPO is an affirmation of the company’s potential and stability. High levels of NII participation increase the perceived value of an IPO and positively influence other investors, hence increasing the overall subscription.

    Categories of NII in IPO

    The NII category consists of several subtypes that have varying attributes and investment objectives. Below are some of the main categories under NIIs:

    • High-Net-Worth Individuals (HNIs): HNIs form a significant chunk of the NII category. Usually, HNIs are individuals with a high income and a net worth of at least INR 5 crore. HNIs could comprise entrepreneurs, high-income earners, experienced investors, etc., seeking sizable returns from IPO allocations.
    • Corporations and Trusts: The NII category often consists of applications from corporations, partnerships, and trusts, among others, that are not part of the retail segment. Corporations invest in IPOs to diversify their asset portfolios or to acquire stakes in companies that are perceived to have growth potential within their industries. Trusts may also seek IPO allocation for the management of wealth, among other growth strategies.
    • Family Offices: Family offices managing the wealth and assets of high-net-worth families are also a part of the NII category in IPOs. The investments are generally long-term growth plays, as they look to buy stakes in promising companies in their initial phase.

    NIIs Rules and Regulations

    The NII segment is highly regulated by rules and regulations, which are different from the regulations applicable to retail and QIB segments in IPOs. A few of the significant rules are as follows:

    • Quota Allocation: At least 15% of the total IPO issue size is reserved for NIIs. This percentage is known as the NII quota in the IPO. All the remaining shares are allotted to Retail Investors, QIB Investors, etc.
    • Minimum Investment: NIIs must apply for IPO shares worth more than INR 2 lakhs, with no upper limit to the investment amount. NIIs are further categorized into sNII and bNII. Investors with IPO application amounts between INR 2 lakhs to INR 10 lakhs are categorized as small NII or sNII. Meanwhile, those investing more than INR 10 lakhs fall under the bNII category.
    • Allotment Rules: In oversubscribed IPOs, each NII applicant is allotted shares worth minimum application size, i.e., INR 2 lakhs, subject to the availability of equity shares in the NII portion. The same is applicable for both sNII and bNII. 
    • IPO Application Modification and Cancellation: Once the IPO application is submitted, NIIs cannot cancel their bid. NIIs can modify their application and are allowed to increase the bid quantity or price.

    Features of an NII Category

    The features of the NII category specify the type of behavior that the investor adopts in the IPO market. Some of the basic features of NIIs include the following:

    • High Investment Threshold: NIIs are required to invest a minimum of INR 2 lakhs in IPO. In India, retail investors can invest a maximum of INR 2 lakhs in an IPO. High investment requirements clearly distinguish NIIs from retail investors.
    • Flexibility in Lot Size to Invest: The NIIs, on the other hand, are not subject to this maximum investment amount applicable to the retail investor.
    • High Risk and Reward: Given that NIIs invest more, a higher risk is associated with the participation of NIIs. However, often, this risk is balanced by the prospect of high returns when IPOs perform well post-listing.
    • Strategic and Informed Investment Approach: Unlike retail investors, NIIs typically do extensive research before applying. They rely on market analysts, financial advisors, or in-house teams to assess the company’s financials, management, industry position, and potential for future growth.
    • Tax Considerations: They also have to weigh the tax implications of their investment returns. NIIs can sell their shares on the listing date but need to be cautious of the taxes applicable to the returns realized.  

    Read Also: What Is An IPO Mutual Fund? Should You Invest?

    Conclusion

    In conclusion, NIIs play a crucial role in the success of an IPO, as they invest substantial amounts of funds and also affect the overall subscription levels. Investment flexibility, high net worth, and special quota reserved for them are some of the key features of the NII category. NIIs lend credibility and attract greater interest and participation from retail investors.

    Every high-net-worth investor, as well as a corporate body intending to invest in an IPO, should be aware of the nuances in the NII category, due to which only those with relevant experience and capital can participate in the NII segment in IPOs.

    Frequently Asked Questions 

    1. What is NII in IPO? 

      NII stands for Non-Institutional Investor. This refers to an individual or organization investing substantial amounts in an IPO, usually exceeding INR 2 lakh in India.

    2. How much is reserved for NII in an IPO? 

      NIIs have 15% of the IPO size reserved for them.

    3. Are NIIs required to be registered with SEBI?

      No, NIIs are not required to be registered with the SEBI.

    4. Do HNIs fall under the category of NII?

      High Net-Worth Individuals (HNIs) fall under the category of Non-Institutional Investors (NIIs).

    5. Can NIIs cancel their IPO bids?

      NIIs are not allowed to cancel their IPO bids but can modify them by increasing the quantity or price.

  • What is an IPO Subscription & How Does it Work?

    What is an IPO Subscription & How Does it Work?

    You may be interested in investing in an Initial Public Offering (IPO) as a new investor. Still, you may need to check IPO subscription status before investing to gauge the demand for IPO shares. Moreover, after applying for the shares, you might be curious about the status of your allocation. 

    In this blog, we will discuss the IPO subscription procedure and how to verify the IPO’s subscription and allotment status. 

    What is an IPO Subscription?

    The procedure by which an investor applies for the shares of a company when they are first made available to the public is known as an Initial Public Offering (IPO). The goal of such an issue varies from company to company; some may use the proceedings to pay off debt, while others may use them to expand their operations. IPO subscription is the process in which the investor applies for the shares offered in the IPO. The investors specify the quantity and the price in their IPO application to subscribe to the IPO. The corporation offers its stock or shares to the public to raise money, and investors subscribe to these shares. This process is known as an Initial Public Offering (IPO).  

    How Does an IPO Subscription Work?

    The steps which are involved in IPO subscription are as follows-

    1. Announcement – A prospectus that includes all of the firm’s information, such as its business model, financials, and the way the funds will be used, must be released when a company chooses to go public and seek money through an initial public offering (IPO). 

    2. Setting The Price – The company must set the price of the issue at which they want to offer their shares to the public in a fixed price issue. On the other hand, in a book-building issue, companies specify a price range within which investors can bid for the shares.

    3. Subscription Period of an IPO – The dates on which the investors can apply for an IPO must be announced. Generally, the IPO opens for 3 to 5 days.

    4. Categorization of Investors –  In an IPO, there are different categories of investors, subject to different rules for participating in an IPO. Different types of investors are mentioned below:

    • Retail Investors – These small investors can apply up to INR 2 Lakhs.
    • Non-Institutional Investors – These investors are considered HNI individuals or corporate houses and invest large amounts.
    • Qualified Institutional Buyers – This category includes banks, mutual fund houses, insurance companies, etc.
    • Anchor Investors – These include large institutions that apply for shares before the issue opens for subscription for the general public.

    5. Bidding – During this phase, the investors apply for the shares. They can specify the quantity and the price at which they wish to apply for IPO shares.

    6. Status of Subscription – Real-time tracking of IPO subscriptions is possible. If the IPO is popular and the investor’s demand for shares exceeds the number of shares offered, the offering is deemed oversubscribed.

    7. Allotment of Shares – The shares offered in an IPO are allotted to the investors in the following way:

    • Allotment to QIB: Shares are allocated to QIBs at the discretion of merchant bankers. But if the IPO is oversubscribed, shares are allotted proportionately.
    • Allotment to Retail Investors: If the IPO is undersubscribed or fully subscribed, retail investors receive the number of shares they applied for. On the other hand, if the IPO is oversubscribed, the investors will be allotted shares based on a lottery system.
    • Allotment to HNIs: In case of an oversubscription, shares are allotted to HNIs proportionately.

    8. Credit of Shares – The allotted shares will be credited to the investor’s demat account.

    9. Listing – Finally, the shares get listed on the stock exchange and become available for trading for investors.

    What is the IPO Process?

    The significant steps of the IPO process are as follows-

    1. Deciding the Issue Size – The first step would be deciding on the issue size or the amount of capital the company wants to raise.

    2. Appointment of Underwriter – The company must appoint an underwriter or investment bank to handle all the regulatory procedures, which includes setting the price range and other due diligence.

    3. Preparing DRHP – The next step would be preparing a Draft Red Herring Prospectus (DRHP), which contains all the company’s business details and financials.

    4. Submission of DRHP– The DRHP is filed with the Securities and Exchange Board of India to get regulatory approval.

    5. Investor Presentation – The company identifies potential investors to present their future plans for the company and tries to convince investors to invest.

    6. Pricing of the Issue – The issue price is set in a fixed price IPO, and in a book-building IPO, a price range is determined, and the issue price is set based on market demand.

    7. Subscription Period – Typically, an IPO opens for subscription for a period of 3 to 5 days, during which an investor can apply for the IPO.

    8. Allotment – Once the subscription period is over, the shares are allotted to the successful bidders and are credited to their demat account.

    9. Listing – The shares are listed on the exchange and become available for trading for the investors.

    How to Check IPO Subscription Status?

    The steps to check the IPO subscription status are as follows-

    1. Through Exchange – One can visit the websites of Indian stock exchanges, i.e. the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Select the Initial Public Offering (IPO) and review the subscription data for different investor categories.

    2. Registrar – Another choice is to go to the registrar’s website, which manages the IPO allocation procedure and offers real-time subscription information. An investor can check the allocation status on the website as soon as the shares are allocated. 

    How to Check IPO Allotment Status?

    The process to check the IPO allotment status on the registrar’s website by following the steps mentioned below –

    1. Registrar Website – Investors can visit the website of the relevant registrar and click on the IPO allotment status tab.

    2. Select IPO – An investor must select the IPO from the drop-down menu.

    3. Enter the Details – Enter the details such as PAN number, application number, or Demat account number.

    4. Status – Click on the submit button, and you can review the status of the IPO application, whether the shares are allotted to you or not.

    Conclusion

    To sum up, as an investor, you need to understand what an initial public offering (IPO) is and the associated procedures. One must know how to track the IPO subscription status, and once the subscription period ends, monitoring application status is also essential. IPO does not ensure a guaranteed return because sometimes IPO shares get listed on the stock exchanges at a discount. Therefore, before making any investment decisions, you should assess your risk tolerance and speak with your financial advisor.

    Frequently Asked Questions (FAQs)

    1. What will happen if an IPO is oversubscribed?

      If an IPO is oversubscribed, the allotment of shares will be based on a lottery system.

    2. Is an oversubscribed IPO good?

      Generally, investors view an oversubscribed IPO favorably since it shows positive market sentiment and faith in the company’s future growth strategy. Oversubscription, however, is not always a sign of a strong stock exchange listing.

    3. What is the meaning of ASBA?

      Application Supported by Blocked Amount, or ASBA, is a way to pay for IPO shares in which the amount required to apply for an IPO is blocked in the investor’s bank account.

    4. How long will it take to get the refund if shares are not allotted in an IPO?

      If shares are not allotted to the investor, the blocked amount is unblocked within three to seven days.

    5. Where can I check the IPO allotment status?

      You can check the IPO allotment status on the registrar’s website after entering the required details.

  • What is FPO: Meaning, Types, Benefits & How it Works?

    What is FPO: Meaning, Types, Benefits & How it Works?

    As an investor, you have probably heard that a firm is planning an Initial Public Offering (IPO), representing the company’s first attempt to raise money from the general public. But what if the business wishes to raise more money after already launching an IPO? There is a procedure called a “Follow-on Public Offer” whereby a company already listed on the stock exchange can raise money from the general public after the IPO. 

    In this blog, we will give information about the Follow-on Public Offer (FPO), 

    What is a Follow-on Public Offer (FPO)?

    A publicly traded corporation can raise money by issuing shares through follow-on public offerings. The corporation raises money to meet capital requirements, expand operations, pay off debt, and other goals. Since the procedure is comparable to an Initial Public Offering (IPO), it can be regarded as a fantastic choice for an established business with a solid track record. 

    How does a Follow-on Public Offer (FPO) work?

    The steps involved in a Follow-on Public Offer are as follows-

    1. Deciding for FPO – The company must first determine whether to raise money through a follow-on public offering. It must also determine the reason behind the FPO, which can be expansion, paying off debt, etc. 

    2. Preparing the Document – After determining the goal of the follow-on public offer, the corporation must prepare the document containing FPO’s details, including the number of shares, pricing, and usage of proceeds. 

    3. Filing the document with the Regulator – The prepared paperwork must be sent to the Securities and Exchange Board of India, the Indian capital market regulator. 

    4. Type of FPO – When developing its offering, the business must choose between a dilutive and a non-dilutive FPO. 

    5. Price Band– The price band within which the investors can bid for shares offered in the FPO must be decided. 

    6. Subscription – Investors can subscribe to the issue by submitting applications through their brokers. 

    7. Allocation of Shares – Following the subscription period, the shares are credited to the demat accounts of investors. 

    8. Listing of Shares – The latter stages involved listing the shares on the market and allowing the general public to trade them.

    Types of Follow-on Public Offers (FPOs)

    The two kinds of Follow-on Public Offer are –

    1. Diluted Follow-On Public Offers – The corporation issues new shares in a diluted follow-on public offer, increasing the overall number of free float shares in the market over time. As a result, existing investors’ shareholding is diluted, but the business gains from this since they can use the funds for debt reduction or expansion. 

    2. Non-Diluted FPO – As stated in the Non-diluted Follow-on Public Offer, current shareholders, including promoters and venture investors, sell a portion of their shareholding rather than the company issuing new shares. This signals that current shareholders are selling their stakes, which raises the market’s share count and liquidity. Investors must exercise caution when investing in such FPOs.

    Examples of Follow-on Public Offers

    Two of the most recent Follow-on Public Offers in India are given below-

    1. Ruchi Soya Limited launched its follow-on public offer of INR 4,300 crores in 2022 to raise capital to reduce its debt.

    2. Yes Bank launched an FPO in 2020 to raise INR 15,000 crores and it was a dilutive FPO.

    What are the Benefits of a Follow-on Public Offer?

    FPO offers various benefits for both companies and investors, as shown below.

    For Companies – The significant benefits of Follow-on Public Offer for companies are as follows-

    Capital – Companies can raise adequate funds through follow-on public offerings that can be used for various purposes.

    • Increased Liquidity – The company’s number of shares will increase after the IPO, which increases liquidity.
    • Reducing Debt – The debt of the company can be reduced through proceeds received from follow-on public offerings.
    • Attracts Investors –Investors usually want to invest in companies that are raising funds to fund their expansion projects.
    • Acquisition – With the raised capital, the company can acquire different companies and expand its business.
    • International Expansion – Through FPO, companies can raise capital and export their goods to other countries to expand their geographical reach.

    For Investors – The significant benefits of Follow-on Public Offer for investors are as follows-

    • Opportunities – The investors consider a follow-on public offer as an investment opportunity.
    • Proven Track Record – Established companies with proven track records issue follow-up public offers.
    • Discounted Prices – Follow-on public offers are typically offered at a discount compared to their market price.
    • Diversification – If the company has strong fundamentals, you can add it to your portfolio to diversify it.

    Why does a Company bring its Follow-on Public Offer?

    The major factors which make a company bring its Follow-on Public Offer are as follows-

    • Additional Capital – The company might require additional funds to expand its operations, acquire new companies, etc.
    • Debt Reduction – The companies can use the capital raised to reduce debt, which eventually reduces interest expense.
    • Improve Liquidity – When a company floats new shares in the market, the liquidity increases.
    • Opportunity to Raise Funds– When the company is performing well and the market sentiment is favorable, the companies can raise funds through follow-on public offers to leverage the investor’s high interest.
    • Compliance – Some companies are required to maintain a minimum of a certain percentage of public shareholding; therefore, a follow-on public offer can be a way to increase the number of shares available for trading in the market.
    • Mergers and Acquisitions – The company can use the funds raised through follow-on public offers to acquire new companies without taking any loans from banks.

    How to Apply for a Follow-on Public Offer?

    There are two ways to apply for a Follow-on Public Offer-

    Online Method

    1. Login – Through online mode, the first step is to log in to your broker account.

    2. Choosing Option – Then go to the section of FPO or IPO.

    3. Choosing the FPO – A table will list FPOs open for subscription, and you can choose the FPO you want to apply for.

    4. Details of Application– Enter the details, such as the quantity of the shares and the price at which you wish to apply.

    5. ASBA– ASBA stands for Application Supported by Blocked Amount, which is the method approved by SEBI to participate in an FPO. Ensure that the amount required to apply for an FPO is in the bank account.

    6. Submission – The last step would be submitting the application form.

    7. Approval of Mandate – The investors are requested to approve the mandate request received on their UPI application. This will block the amount in the investor’s account.

    Offline Method

    1. Getting the Form – You must visit your broker’s branch and ask about the FPO application form.

    2. Filling the Details – The form provided by the brokers requires various details, such as a Demat account number, PAN Card, quantity to be purchased, and bidding details.

    3. ASBA Form Submission: Visit your bank branch and fill out an Application Supported by Blocked Amount (ASBA) form with all the details related to the FPO application.

    4. Submission of Form – Submit the form to the broker with complete details.

    5. Confirmation – Then, your broker will process your application form and provide you with confirmation.

    Differences between an Initial Public Offer (IPO) and a Follow-on Public Offer (FPO)

    The significant differences between an Initial Public Offer (IPO) and a Follow-On Public Offer (FPO) are as follows-

    ParticularsIPOFPO
    MeaningAn initial public offering (IPO) is the first time a private firm issues shares before going public.It is a publicly listed company’s subsequent issuance of shares.
    Stage of CompanyA private limited firm that is going public for the first time launches an IPO.FPO is launched by a business that is already listed on the stock exchange.
    Price RangeThe company determines the IPO price depending on its valuation. A book-building process is used to make the decision.To attract investors, the shares in an FPO are often sold at a price lower than the current market price.
    ComplianceThe IPO is subject to strict regulations as the company is getting listed for the first time on the stock exchange.Regulations requirements for an FPO are less stringent as the company is already listed.
    Potential Returns IPOs usually offer higher chances of capital appreciation.FPOs usually have a lower potential for capital appreciation.
    RiskThese are considered more risky due to the unavailability of adequate data related to the company’s past financial performance.It is generally considered less risky because the company’s performance is already known to the investors.

    Conclusion

    To sum up, a follow-on public offering is a fantastic method for a publicly traded company to raise more money, which it may use to grow its operations or pay down its debt. Additionally, it offers investors a fantastic chance to invest in an already listed company at a discount, as FPO shares are usually offered at a price lower than the current market price. It is recommended that you speak with your financial advisor and consider the risks associated with investing in an FPO of a particular company.


    Frequently Asked Questions (FAQs)

    1. What is the difference between FPO and IPO?

      An FPO is issued by a company that has already gone public, while an IPO is a corporation’s initial sale of shares to the general public. This is the main distinction between the two. FPO is typically less risky for investors since the company’s stock has already been listed on a public exchange and offers a history of the business’s financial and operational performance. 

    2. Why do companies consider issuing FPO?

      To boost the liquidity of the company’s stock, companies might conduct follow-on public offers by issuing more shares if they want to obtain additional funds for expansions, acquisitions, and debt reduction. 

    3. How can an FPO impact the stock price?

      Share prices may drop in the short term in the event of a dilutive FPO, but in the case of a non-dilutive issue, the FPO issue has no effect on share prices, and if the firm does well, share prices will eventually rise in the long term. 

    4. How do you access the valuation of a follow-on public offer?

      One must assess several key financial aspects, such as historical performance, regulatory risks, reasons behind raising funds, etc., before applying for a follow-on public offer. 

    5. How can I subscribe for a follow-on public offer?

      An investor can subscribe for a follow-on public offer through their broker. The application process is similar to an IPO, and individuals can apply during the subscription period and may receive the allocation based on demand. 

  • Anchor Investors in IPOs – Meaning, Role & Benefits

    Anchor Investors in IPOs – Meaning, Role & Benefits

    Have you ever wondered who the influential investors are that step in to support a company’s initial public offering (IPO)? Known as anchor investors, these key players are essential for the success of any public offering.

    In this blog, we will give information about anchor investors in Initial Public Offerings (IPOs), examining how their participation impacts share pricing and demand. We will also highlight the advantages they offer to companies and the overall market.

    What is the meaning of Anchor Investor?

    An anchor investor is a qualified institutional buyer (QIB) who invests at least INR 10 crores or more in a mainboard IPO or INR 1 crore in an SME IPO. Securities and Exchange Board of India (SEBI) introduced the concept of Anchor investors in 2009.

    These investors boost credibility and attract interest in an IPO by investing a large amount early because anchor investors are well-established institutions like mutual funds, pension funds, etc. Their involvement can stabilise prices, boost demand, and lessen volatility.

    Why do companies need Anchor Investors?

    Companies require anchor investors for the following reasons:

    • Enhance Credibility and Confidence: As mentioned above, anchor investors consist of reputable financial institutions whose participation is a strong endorsement of the company. When these investors commit to buying shares, it instils confidence in other investors, making the IPO an attractive investment opportunity.
    • Create Demand & Price Stability: Anchor investors buying a large stake upfront helps establish a stable price floor for the stock. It lowers the risk of price volatility when the stock begins trading because these investors own a substantial portion of the shares.
    • Attract Retail Investors: Investments by anchor investors make the IPO popular, which encourages smaller retail investors to invest.
    • Reducing Underwriting Costs and Risks: Pre-allocating some shares makes it easier and cheaper for companies to sell the rest. Anchor investors reduce the risk of unsold shares, making the IPO process more efficient and cost-effective.
    • Ensuring Long-term Commitment: Anchor Investors commit to a lock-in period, during which they are prohibited from selling their shares for a specified duration following the IPO. This guarantees that a segment of shares stays with investors who are invested based on a long-term outlook, thus increasing stability during the crucial early post-listing phase.

    Importance of Anchor Investors

    Anchor investors are important for the financial market due to the following reasons:

    • Strong Financial Base: By investing substantial capital upfront, anchor investors create a financial cushion that enables companies to achieve their fundraising objectives.
    • Enhanced Reputation: Securing investments from esteemed investors enhances the company’s reputation in the market. Their involvement highlights the company’s growth potential, thus increasing its attractiveness among other investors.
    • Reduced Volatility Post-IPO: The commitment to a lock-in period effectively narrows price fluctuations in the initial trading phase, resulting in a more stable stock price.
    • Positive Market Perception: Anchor Investors boost positive sentiment for the IPO, often resulting in oversubscription. This optimistic outlook can ultimately benefit the stakeholders involved.

    How Do Anchor Investors Operate?

    The company issuing the IPO selects anchor investors based on their financial strength, reputation and compatibility with its vision. Anchor investors receive a significant allocation of IPO shares, generally around 30% of the total offering or 60% of the total QIB quota. These investors pledge substantial investments, providing a reliable financial foundation for the offering. Let’s understand how anchor investors operate.

    1. The company unveils a price range for the IPO, which is the basis for determining the final price.
    2. Anchor investors submit their bids at a fixed price, indicating the quantity of shares they wish to acquire and must pay the entire amount at the time of application. Anchor investors can place bids one day before the issue opens to the general public.
    3. Shares are allocated to anchor investors one day before the IPO opens for the general public. The final offer price is determined through the book-building process.
    4. They commit to staying invested for 30 days for 50% of the shares, and the rest of the shares must be held for 90 days after the allotment date. This period is often referred to as the lock-in period.
    5. The lock-in period decreases the chances of immediate sell-offs, fostering price stability for the stock during its initial post-IPO trading phase.

    Once the lock-in period is over, anchor investors can sell their shares either on the open market or through alternative methods.

    Things to know about Anchor Investors

    Some important facts about the Anchor investors are:

    1. For anchor investors, the minimum bid amount is INR 10 crore. 
    2. One-third of the Anchor Investor Portion will be reserved for domestic mutual funds, provided they submit valid bids at or above the valid price.
    3. Anchor Investors must submit their bids exclusively through one of the Book Running Lead Managers (BRLMs) associated with the offering.
    4. Bidders and applicants seeking information based on the allotment for Anchor Investors can review the RHP or the prospectus.
    5. The price at which equity shares are allocated to anchor investors will be decided by the company after consulting the BRLMs.

    Allocation to anchor investors is discretionary and subject to the following conditions:

    1. For allocation up to INR 10 crores, a maximum of two anchor investors is allowed.
    2. For allocations between INR 10 crores and INR 250 crores, a minimum of 2 and a maximum of 15 anchor investors are allowed, with a minimum investment of INR 5 crore per investor.

    Lock-in period for Anchor Investors

    In India, the lock-in period for anchor investors is structured as follows:

    1. Anchor Investors cannot sell 50% of the shares for 30 days starting from the date of allotment. 
    2. The remaining 50% of the shares will be locked in for 90 days starting from the date of allotment.

    Furthermore, the staggered lock-in period facilitates the gradual selling of shares, minimising the risk of volatile price fluctuations that could arise from large-scale sell-offs by anchor investors right after the listing date.

    Anchor Investor’s Reservation in IPO

    Additionally, anchor investors in an IPO represent a specific group of Qualified Institutional Buyers (QIBs) who are allocated a share of the total issue size during the IPO. These investors can reserve a maximum of 30% of the total IPO size and 60% of the QIBs’ quota. One-third of the allocation for anchor investors is designated for domestic investment funds.

    Read Also: What is an IPO Subscription & How Does it Work?

    Conclusion

    In summary, anchor investors play an important role in the IPO process. Their early commitment and reputation create a strong foundation for a successful IPO, reassuring investors about the company’s potential. Anchor investors help improve stock performance by driving demand, stabilising prices, and establishing credibility. In today’s evolving market, having trustworthy anchor investors is not merely beneficial; it is essential for companies aiming for a solid debut on the stock exchange.

    Frequently Asked Questions (FAQs)

    1. Can an individual become an anchor investor?

      An individual investor cannot become an anchor investor. To be classified as an anchor investor, the entity must be a qualified institutional buyer (QIB).

    2. Do anchor investors affect the IPO’s success?

      The participation of anchor investors often attracts more investors, which increases participation that can lead to a more robust stock performance on the listing date.

    3. Can anchor investors sell their shares immediately after listing?

      Anchor investors cannot sell their shares immediately after the listing date because of the lock-in period. This lock-in period helps stabilise the stock price during the early days of trading on the stock exchange.

    4. How do anchor investors impact IPO?

      By investing significant capital, anchor investors establish a solid base, which enables companies to secure a significant portion of their fundraising target quickly and enhances investor confidence in an IPO.

    5. What are the minimum investment requirements to qualify as an anchor investor?

      To be eligible as an anchor investor, the financial institution must invest at least INR 10 crores in a mainboard IPO and at least INR 1 crore in an SME IPO.

  • What is the Book-Building Process in an IPO?

    What is the Book-Building Process in an IPO?

    If you are a stock market investor, you have probably heard of the Initial Public Offering (IPO), which is the procedure by which a business makes its shares available to the general public for the first time. However, have you ever thought about how the share price is determined? A business determines the price of its share by using a procedure known as the Book Building Process.

    In this blog, we will describe the book-building process, its advantages and how it differs from the fixed price issues.

    What is the Book Building Process in an IPO?

    Businesses that want to go public and list their shares on the stock market use the book-building process as a price discovery technique. It is the most popular approach businesses use to set the price of the shares offered in an IPO, as it is the most effective and transparent way to determine the share price based on market demand. The Book Running Lead Manager is responsible for establishing the cut-off price by using a weighted average method. 

    Example:-

    Assume ABC Limited chooses to issue shares to the public to raise money. This is known as an initial public offering. To determine the issue price, they chose to use a book-building process and hired an underwriter. The corporation chose to issue 10,000 shares in total, with a price range of INR 100 to INR 110. Below is the tabular representation of investor bids:

    Investor NumberNumber of Shares AppliedBid Price
    Investor 11000100 INR
    Investor 22000105 INR
    Investor 35000108 INR
    Investor 47000104 INR

    The underwriter determines a weighted average price based on the above data, and we’ll assume that the corporation ultimately decides on a cut-off price of 105. Shares may be allotted to investors who bid on or above the cut-off price; investors who applied for the IPO with a bid below the cut-off price will not get any shares. Only Investors 2 and 3 are eligible to receive an allotment, whereas the IPO applications of Investors 1 and 4 will be rejected in the above scenario.  

    How does the Book Building Process Work?

    The steps which involve the book-building process are as follows-

    1. Investment Banks – The first step is to select an investment bank as an underwriter for the Initial Public Offering (IPO). They assist the company in determining the issue size and establishing the share price range.

    2. Price Band – The next stage would be to determine the minimum and maximum price of the shares offered in the IPO. 

    3. Drafting Prospectus – A prospectus is prepared by the underwriter and contains details about the financials, business model, the objective of the issue, the shareholding pattern of the company, etc.

    4. Approval of Prospectus – Once the prospectus is drafted, it will be sent to the Securities and Exchange Board of India. SEBI thoroughly analyzes and approves the document.

    5. Bidding – Investors can apply for the IPO during the bidding period specified by the company, which typically lasts for 3 days.

    6. Compiling Bids – Once all the bids are received, the lead manager compiles them and analyzes the quantity of shares applied by the investors at different price levels.

    7. Cut-Off Price – Based on the bidding data, the lead managers determine the cut-off price. The investors who have applied for shares at or above the cut-off price may receive shares, but those who have applied below the cut-off price will not get any shares.

    8. Allocation – Successful bidders will receive shares in their demat account.

    Types of Book Building

    There are generally two types of book-building process-

    1. Accelerated Book Building – Accelerated Book-Building process is used when businesses want to raise funds quickly. The process is completed within one to two days because the underwriters approach institutional investors due to their ability to invest large amounts quickly.

    2. Partial Book Building – In this process, the issuer reserves a limited number of shares for the Book-Building process, and the rest of the shares are offered at a fixed price.

    Why do Companies Opt for the Book Building Process?

    For several reasons listed below, the majority of Indian businesses choose to use a book-building process to determine the share price for their initial public offering.-

    1. Market Price – The price of the IPO share is decided by the market participants, which generally reflects the actual market value based on the sentiments of the investors.

    2. Increased Participation – Due to the market-driven pricing mechanism, investor confidence increases, which encourages more participation by the investors.

    3. Fair Value – The shares may be overpriced or underpriced if a company chooses to issue at a predetermined price; however, the fair value of the issue will be determined if the company chooses to use the book-building process to determine the issue price. 

    4. Regulations – The Securities and Exchange Board of India has issued certain guidelines for the book-building process, which ensures fairness and transparency in price discovery.

    5. Allocation of Shares – Determining price through a book-building process ensures a more efficient allocation of shares. 

    Advantages of Book Building in IPOs

    The major advantages of the building process in IPO are as follows-

    1. Flexibility – The book-building process allows the company to adjust the share price within the price range, which helps maximize investor participation. 

    2. Reflects Demand – Book-building issues help companies determine the demand for shares among investors.

    3. Maximizes Capital Raised– This method can help the company raise more capital as it determines the fair value of shares based on investor demand. 

    Difference between Fixed Price Issue and Book Building

    The major differences between fixed price and book-building issues are as follows-

    ParticularsFixed Price IssueBook Building
    MechanismIn this method, the price is determined by the underwriters.The price of the issue is determined by the investors through the bidding process.
    Price DiscoveryFixed Pricing doesn’t allow price discovery as the price is fixed by the company.Book-building process allows for price discovery with the help of investor bidding. 
    FlexibilityThe investor doesn’t have the flexibility to choose the price and must accept the price set by the company.Investors can place bids within the price range specified by the company.
    RiskThere might be some risk related to underpricing and overpricing of the share price.The pricing risk is much lower in the book-building issue.
    UsageThis method is generally used by smaller companies with smaller issue sizes.The book-building process is widely used by the company with large IPO issue sizes.

    Read Also: From Private to Public: Decoding the IPO Journey

    Conclusion

    Determining the share price of an IPO is an important task in the Initial Public Offering (IPO) process. The company may miss out on raising the maximum capital possible funding if the offer is underpriced. Conversely, investors may decide not to subscribe if the issue is overpriced. Therefore, before investing in any initial public offering (IPO), investors should determine whether the issue is reasonably priced and speak with their investment advisor. 

    Frequently Asked Questions (FAQs)

    1. Can I change my bid price after submitting an IPO application?

      No, investors cannot modify their bids after submitting an IPO application. However, investors can cancel the existing IPO application and apply again before the share allotment happens.

    2. What will happen if I submit the IPO application below the cut-off price?

      If you submit your IPO application’s bid price is below the cut-off price, you will not be eligible for any allotment.

    3. What is the meaning of the 100% book-built issue?

      The 100% book-built issue refers to the IPO in which all the shares are offered through bids or a book-building process.

    4. What is the floor price in an IPO?

      It is the minimum price at which investors can place bids in an IPO.

    5. What is the bid price in an IPO?

      It is the price at which an investor wishes to buy the securities that are being offered during the book-building process of IPO.

  • What is DRHP (Draft Red Herring Prospectus)?

    What is DRHP (Draft Red Herring Prospectus)?

    For any company seeking to go public, submitting a Draft Red Herring Prospectus represents a pivotal milestone in the Initial Public Offering (IPO) process. This document is submitted to regulators and offers an overview of the company’s operations, finances, management, and possible risks. DRHP offers investors comprehensive insights that determine their interest in an upcoming IPO. Understanding the intricacies of this document is essential for anyone looking to invest in an upcoming IPO.

    In this blog, we will discuss the Draft Red Herring Prospectus (DRHP), how it is prepared, its importance and the difference between RHP (Red Herring Prospectus) and DRHP.

    What is a Draft Red Herring Prospectus?

    A Draft Red Herring Prospectus is a preliminary document submitted to the Securities and Exchange Board of India (SEBI), a regulatory body in India when a company plans to launch an Initial Public Offering (IPO). It offers vital insights into the company’s business operations, financials, risks, and goals for raising capital. It does not specify the number of shares offered or the price, as these details are decided later.

    IPO stands for Initial Public Offering. It refers to the process a private company follows when it first sells its shares to the public on the stock exchange. This transforms the company from being privately owned to publicly owned.

    Launching an IPO and getting listed on the stock exchange can be a significant event for any company. However, this journey demands meticulous planning, due diligence and execution.

    How is a DRHP prepared?

    Preparing a DRHP is a lengthy process, starting with the company appointing merchant bankers to determine the IPO details and ensure everything complies with the regulatory needs. The legal advisors ensure that all disclosures and anything else mentioned by the company will not lead to any litigation.

    Significant due diligence is performed on the operations, financial statements, assets, liabilities, history of litigation, and dealing with the regulatory framework of the concerned company. Conducting due diligence is vital to ascertain that what is stated in the DRHP stands true for accuracy and comprehensiveness.

    This phase consists of assessing the company’s business model, sources of income, market placement, and competition against other players. The company presents its financial statements for the past three years, which are then audited by an independent auditor. This part of the DRHP contains profit and loss statements, balance sheets, cash flow statements, and financial ratios. 

    An essential element of the DRHP is the risk factors section, which details the various risks that could affect the company’s operations or stock performance. This includes market competition, regulatory challenges, operational uncertainties and external influences. The document also includes an analysis of the industry landscape, trends, growth prospects, and the company’s position.

    Legal advisors create documents to ensure the prospectus meets regulations and follows guidelines set by the regulatory authority. This involves preparing disclosures on shareholding patterns, promoter details, the board of directors, and corporate governance structure. The DRHP is usually available for the public on the regulatory authority’s website, allowing investors and analysts to review and analyze new IPOs.

    The draft document is subsequently submitted for review to regulatory authorities such as the SEBI in India or the SEC in the United States. Regulatory authorities verify the details mentioned in the DRHP and may request changes or clarifications. The company changes the document based on the feedback from the regulatory body.

    Once the regulatory body approves the DRHP, it is finalized into an RHP (Red Herring Prospectus). The RHP document includes information about the price range, issue size, etc. 

    Read Also: What is a Confidential IPO Filing?

    Benefits and Importance of a Draft Red Herring Prospectus

    The benefits of a DRHP are:

    • Helps in Investment Decisions: The DRHP offers a detailed look at the company’s operations, finances, and risks, helping investors evaluate its financial health and make informed investment decisions.
    • Compliance with Regulatory Standards: Regulatory bodies like the SEBI in India require companies to submit a DRHP document to ensure that they meet disclosure requirements and that the IPO process stays transparent. It allows regulators to review company disclosures, reduce fraud risk and protect investors.
    • Establishing Credibility and Market Confidence: A well-prepared DRHP enhances the company’s credibility by demonstrating its commitment to transparency and regulatory compliance. This boosts investor confidence, attracting more interest in the IPO.
    • Opportunity to Showcase the Company’s Potential: The DRHP offers companies a chance to showcase their growth potential, strengths, competitive advantages, and unique position within the industry. It allows them to present a compelling narrative about their future prospects.
    • Gauging Investor Interest and Feedback: The DRHP is usually posted on the regulatory authority’s website for the public. This lets potential investors, analysts and market participants review the document and share the comments and concerns.
    • Legal Protection and Reduced Liability: By providing clear and complete information in the DRHP, the company reduces the risk of lawsuits and regulatory penalties for non-disclosure of important information. This protects the company and shows that it is acting in good faith by keeping the investors informed.

    DRHP Vs. RHP

    CriteriaDRHPRHP
    DefinitionThe DRHP is a document submitted to the SEBI by the company, which marks the first step in the IPO process.The RHP is the final document issued after the SEBI approves the DRHP.
    TimingFiled before the IPO to allow SEBI and the public to review and provide feedback.After incorporating the feedback of the SEBI, the DRHP is approved and finalized into an RHP.
    PurposeDRHP is prepared to seek SEBI approval and public feedback.To provide complete, final details to investors before the IPO opens.
    ContentThe DRHP includes most of the details needed, such as the business overview, financials, risks, strengths etc.The RHP has the complete information, including the price range, total shares being offered, and the IPO dates.

    Read Also: What is Face Value in an IPO?

    Conclusion

    Submitting DRHP to the regulator is an important event for companies and investors during the IPO process. For businesses, it guarantees transparency and adherence to regulations, allowing them to effectively showcase their strengths and future potential to investors. The DRHP helps companies maintain accountability and provides investors with tools to evaluate whether to invest in the IPO. The document increases market transparency and builds trust between companies and investors, paving the way for a successful IPO and long-term growth.

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    Frequently Asked Questions (FAQs)

    1. Why is DRHP important?

      A Draft Red Herring Prospectus (DRHP) is important because it helps investors make informed investment decisions and ensures regulatory compliance for companies going public.

    2. Is a DRHP the same as a RHP?

      No, the DRHP is a preliminary document. After regulatory review and finalization, it becomes RHP with full IPO details.

    3. Who reviews the DRHP?

      Regulatory authorities, such as SEBI in India, review the DRHP to ensure compliance.

    4. What is the validity of DRHP?

      A DRHP is valid for 12 months from the date of receiving the SEBI’s Observation letter. SEBI reviews and issues an observation report within 30 days of submission of DRHP.

    5. How is a DRHP different from a shelf prospectus?

      A DRHP is a document related to IPOs, while a shelf prospectus is a document when a company wants to issue bonds. 

  • Bajaj Housing Finance IPO Case Study: Products, Financials, And SWOT Analysis

    Bajaj Housing Finance IPO Case Study: Products, Financials, And SWOT Analysis

    Owning a home is a significant achievement, especially for those with low incomes, and many businesses strive to make this dream a reality by offering various loans. Bajaj Housing Finance Limited, which is preparing for a substantial IPO of INR 7,000 crore, is one such company.

    In this blog, we will go deeply into the company’s finances, KPIs, and IPO details.  

    About Bajaj Housing Finance Ltd

    Bajaj Housing Finance Limited, established in 2008, is a wholly-owned subsidiary of Bajaj Finance Limited, which is one of the most diversified NBFCs in India. The company offers financing solutions to both individuals and corporates for purchasing and renovating homes or commercial spaces. Additionally, it provides loans against property for business or personal needs and working capital for business expansion.

    Bajaj Housing Finance Limited holds the highest credit ratings from CRISIL and India Ratings, with a AAA/Stable rating for its long-term debt and an A1+ rating for its short-term debt program.

    IPO of Bajaj Housing Finance Limited

    The Reserve Bank of India released a list of non-banking financial companies in 2022 with assets under management (AUM) totaling INR 50 thousand crores. Bajaj Housing Finance was on the list and is scheduled to go public on the stock exchange by September 2025, according to the guidelines established by the RBI. 

    On June 14, 2024, Bajaj Housing Finance Limited submitted the DRHP (Drafter Red Herring Prospectus) to the capital market regulator, i.e., SEBI.

    It is expected that the company is planning to raise INR 7,000 crore via IPO, of which INR 4,000 crore would be a fresh issue and INR 3,000 crore would be offered for sale by Bajaj Finance Limited, the company’s parent arm. 

    Bajaj Housing Finance Financial Highlights

    Let’s have a look at the financials of the company.

    Balance Sheet (INR crore)

    Particulars31st March 202431st March 202331st March 2022
    Non-Financial Asset215125134
    Financial Asset81,61264,52948,393
    Total Asset81,82764,65448,527
    Equity12,23410,5036,741
    Non-Financial Liabilities897544
    Financial Liabilities69,50554,07641,741
    Bajaj Housing Finance Limited Balance sheet

    Income Statement (INR crore)

    Particulars31st March 202431st March 202331st March 2022
    Revenue from operations7,6175,6653,767
    Total Income7,6185,6653,767
    Total Expenses5,4563,9652,807
    Profit before tax2,1611,700960
    Profit after tax1,7311,258710
    Bajaj Housing Finance Limited Income Statement

    Cash Flow Statement (INR crore)

    Particulars31st March 202431st March 202331st March 2022
    Net Cash flow from operating activities(15,428)(14,332)(12,481)
    Cash flow from investing activities273(611)2,197
    Cash flow from financing activities15,12514,63010,228
    Bajaj Housing Finance Limited Cash Flow Statement

    KPIs of Bajaj Housing Finance

    Let’s have a look at the key performance indicators of the company.

    Particulars31st March 202431st March 202331st March 2022
    NNPA Ratio (%)0.100.080.14
    Return on Net Worth (%)15.214.611.1
    Debt to Equity Ratio5.75.16.2
    Earnings Per Share2.61.91.5

    Based on the above table, the company’s earnings per share and debt-to-equity ratio are both rising when compared year over year.

    Read Also: Aadhar Housing Finance: IPO And Key Insights

    Product Portfolio of Bajaj Housing Finance

    Product Portfolio

    Customers can choose from a wide variety of products offered by Bajaj Housing Finance, all of which are tailored to satisfy the user’s demand. 

    1. Loan facility to purchase and construct a home. Also, loans to renovate and extend the home.

    2. Loans against property – residential and commercial property.

    3. Top-up and working capital loans.

    4. It also facilitates transferring loans from other financial institutions.

    Bajaj Housing Finance Business Model

    The Bajaj Housing Finance Limited offers a wide range of products to satisfy the financial demands of borrowers who want to buy, build, or renovate a home. In addition to offering financial support, they offer other services, including credit counseling and property insurance. By providing these services, the company hopes to give its customers a one-stop shop for housing finance solutions. 

    Bajaj Housing Finance SWOT Analysis

    SWOT Analysis

    Strengths

    • Because of its parent firm, Bajaj Housing Finance Limited has a reputed brand recognition in the financial industry. 
    • The company offers a wide range of products, such as loans against property, home development, etc. 
    • Its wide nationwide branch network makes the organization easily accessible to a wide range of clients. 

    Weakness

    • The company’s consumer base is restricted to India because of its exclusive India-only operations. 
    • The company faces tough competition from several banks and home finance providers. 
    • Since they rely more on borrowing money, changes in interest rates may affect their operations and reduce operating margins. 

    Opportunities

    • The growing demand for affordable housing and the increase in disposable income of Indians can further expand the growth prospects of the company. 
    • The company has the potential to expand its loan portfolio and enhance profitability by offering loans through an online platform.
    • The company can offer home loans in partnership with real estate developers. 

    Threats

    • Any economic downturn could hurt India’s real estate industry’s expansion which may hamper the profitability of the company. 
    • The company is operating in a highly regulated environment. Its operations and profitability may be impacted if the government makes unfavorable regulatory changes. 

    Read Also: Mukka Protein IPO: Business Model, Key Details, Financial Statements, and SWOT Analysis

    Conclusion

    In summation, Bajaj Housing Finance Limited is a major player in the housing financing industry, the business has a strong legacy from its parent firm, Bajaj Finance Limited. In addition to providing a wide choice of products to meet consumer needs, the company is also going through a digital transformation. 

    The company is planning an IPO to comply with RBI laws, and they have submitted DRHP to the regulator, i.e., SEBI. The price band and IPO dates are yet to be announced by the company. However, it is suggested to consult with your investment advisor before making any investment in the IPO. 

    Frequently Asked Questions (FAQs)

    1. What is the issue size of the Bajaj Housing Finance IPO?

      Bajaj Housing Finance proposes to come up with an issue of INR 7,000 crores, which includes 4,000 crores of fresh issue, and 3,000 crores of offer for sale.

    2. What does Bajaj Housing Finance Company do?

      The company offers finance facilities to individual and corporate entities to construct, renovate, and extend houses and commercial spaces.

    3. Who is the chairman of Bajaj Housing Finance Limited?

      As of June 2024, Sanjiv Bajaj is the chairman of Bajaj Housing Finance Limited.

    4. In which year was Bajaj Housing Finance established?

      The Bajaj Housing Finance Limited was established in June 2008.

    5. Is Bajaj Housing Finance a profitable company?

      Yes, Bajaj Housing Finance is a profitable company that has posted profits for the last 3 years.

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