Skip to main content

What exactly is an IPO?

When a company wants to raise money, one of the ways it can do so is by selling its equity shares to the public. If it happens to be the first public offer of the company, it is known as the initial public offer (IPO).

In an IPO, the promoters share in the company's equity comes down, as the number of shares issued by the company (paid-up capital) increases.

After the IPO, the shares get listed on the stock exchange and shareholders can trade their shareholdings on the bourses.

To make an IPO, a company has to file a prospectus with the Securities and Exchange Board of India (SEBI) stating the purpose of raising the money and disclosing other details of the company and its directors.

Once it is approved by SEBI, the company files the prospectus with the registrar of the company to initiate the process of IPO. According to SEBI norms, a minimum of 30% of any IPO is reserved for retail investors — those who are applying for shares worth less than Rs 1,00,000.

The shares are allotted on a pro-rata basis among applicants. That means, if the retail investor portion of the IPO is oversubscribed by two times, every applicant will get half of the number of shares he applied for.

For large investors, whose application size is more than Rs 1,00,000 each, there is a minimum reservation of 10%. In this category too, shares are allotted on a pro-rata basis.

The offer price for shares in a public offer can be fixed before the issue. It can also be discovered through gauging the demand in the market for shares at various price points. The second method is called the book-building route.

In this, the issue manager fixes a price-band rather than a single price for the IPO and asks investors to bid for shares in that price range.

The price band is fixed on the basis of the fundamentals of the company, the performance of share prices of other companies in the same sector on bourses and market survey conducted by issue managers.

An investor can bid for shares at various price levels. Normally, the demand for shares at the minimum price level is the maximum. But when the market is booming, the issue is often oversubscribed at the higher end of the band itself. In such a case, the offer price is ultimately fixed at the upper end of the band.

What is a follow on-public offer?

When a listed company makes a public offer to raise funds, it is called a follow-on public offer. In these cases too, the offer price can be fixed or be discovered through book-building. Normally, the offer price is at a 10-20% discount to the prevailing share price in the market

 company can raise funds through a rights issue. In this, the company gives shares only to existing share holders at a certain ratio to the number of shares already owned. For example, in the case of SBI, one rights share is to be given for every five SBI share owned.

Normally, a rights issue has the twin purposes of rewarding the shareholders of the company and raising funds. Shares are, therefore, typically offered at a 30-50 % discount to the prevailing market price.

Therefore, just before a rights issue, the share price of the company goes up.

Popular posts from this blog

Bio-fuel has top investors powered up

23RD ,JUNE India's fortune-hunters believe their new-found love for biofuel will pay off. India's well-known investors who are known for their Midas touch have spotted an opportunity in bio-fuel, betting big on ethanol, bio-mass and even bio-fuel equipment makers in India and other parts of the globe. Billionaires Rakesh Jhunjhunwala, C Sivasankaran, Vinod Khosla, founder of Sun Microsystems, and Nemish Shah, the media-shy joint partner of Enam Financial Services, are investing in bio-fuel makers quietly, expecting that bio-fuel will have a big play in the coming years as the world looks for a viable alternative to the fast depleting oil reserves. Jhunjhunwala, who is known for his ability to spot a multi-bagger at a very early stage, recently invested in Hyderabad-based bio-fuel firm Nandan Biometrics.He is also a 10 per cent stakeholder in Praj Industries, which is a bio-fuel technology provider…

up to 8,500% return in 5 years! Investors made a killing in these 30 smallcap stocks

U By Rahul Oberoi, ETMarkets.com | Updated: Dec 01, 2017, 04.06 PM IST Post a Comment
Efficiency pays in the long run. Among the top smallcap plays on Dalal Street, 30 companies with stable return on equity (RoE) and return on capital employed (RoCE) have surged up to 8,500 per cent over the past five years.

All these companies had a debt-to-equity ratio of less than 1 and have been maintaining RoE and RoCE of over 20 per cent since 2012-13.

Avanti Feeds emerged the chart topper, with an 8,527 per cent gain to Rs 2,596.60 as of November 28 from Rs 30.10 ..


ovember 28 from Rs 30.10 on November 27, 2012. The company’s return on equity for FY17, FY16, FY15, FY14 and FY13 stood at 42.65 per cent, 46.21 per cent, 52.41 per cent, 45.79 per cent and 27.60 per cent, respectively. Avanti also managed to achieve a return on capital employed of over 50 per cent in last four years. Its RoCE stood at 28.59 per cent inRoE measures net income earned for every rupee of shareholder funds, while…

5 dark-horse picks

Kwadrat/shutterstock.com Kwadrat/shutterstock.com
If you are a conservative investor, using the mutual fund route is the best way to invest in stocks. But if you are game for some excitement, you might want to dabble directly in stocks, especially small-cap stocks. Stocks that are smaller in size, in terms of market capitalisation, carry higher risk. The reasons are — one, lower traded volume increases price volatility, two, information is usually scarce on these companies, three, business risk is higher since many of these companies are dependent on a single product and four, governance risk is also higher in these stocks. That said, small-cap stocks have the capacity to deliver far greater returns when compared to large-cap stocks. Sample this: there were 16 stocks with market cap more than ₹50,000 crore in January 2009. These stocks delivered an average return of 138 per cent in the last eight years but 4 out of every 10 stocks in this group delivered negative returns. On the ot…