IPO Basics

Traders base their profits on different kinds of purposes. One may be a long-term investment which is a gradual process, yet may produce high returns. The other can be a short-term strategy which includes trading with quick gains. One such method is Intraday Trading.

How does company ownership work?

Companies can either be:

Private ownership of a company implies it is totally funded by one or many private entities. A publicly owned company is one which is at least partly funded by the public and traded on share markets. A person or an institution that funds a company is part owner of the company and is allotted shares of the company, bestowing voting rights on the shareholder.

The Company appoints a board of directors based on the majority vote of the shareholders. The board of directors is empowered to make decisions on behalf of the company.

IPO stands for Initial Public Offering, and means just that - a company offering itself (or its shares) to the public. An Initial Public Offering is the first offer of shares made by a private company to the general public. In an IPO, the private company offers new shares to the public in exchange for capital. This capital is then used by the company for growth.

After shares are allocated to the buyers, the company is listed as a publicly traded stock in a share market. Trade on the shares takes place daily, in accordance with the share market’s rules and regulations. The amount of stock in circulation is called float.

Definition and basic terms

IPO guidelines for beginners

Types of bidders

Types of bidding

IPO Subscription Procedure

Types of IPOs

IPOs are how companies get listed on stock markets. To get in on the action, you must be familiar with the IPO investment tips and strategies. You should also know the different types of IPOs there are which is why we’re here to discuss every detail.

Fixed Price issue vs. Book Building issue

IPO allotment basics

The IPO allotment process is fairly simple. Investors place bids for shares. If shares are offered at a particular fixed price (issue price), then all bids are made at that price. However, share price can also be fixed or discovered after assessing demand for the stock by the book building process.

In the book building process, bids are placed within a price range and finally a price is fixed. All of the bids at the fixed price and above get shares. Thus, if you think that there are chances that a particular IPO might be in a high demand, i.e. the IPO might be over-subscribed; it's always prudent to bid for shares at the cut off price. If you choose the cut off price option while bidding for shares, you will get shares at the cut off price determined later on.

But, what happens when more number of bids is received than there are shares? The company then divides up the shares among bidders.

IPO allotment basics

The IPO allotment process is fairly simple. Investors place bids for shares. If shares are offered at a particular fixed price (issue price), then all bids are made at that price. However, share price can also be fixed or discovered after assessing demand for the stock by the book building process.

In the book building process, bids are placed within a price range and finally a price is fixed. All of the bids at the fixed price and above get shares. Thus, if you think that there are chances that a particular IPO might be in a high demand, i.e. the IPO might be over-subscribed; it's always prudent to bid for shares at the cut off price. If you choose the cut off price option while bidding for shares, you will get shares at the cut off price determined later on.

But, what happens when more number of bids is received than there are shares? The company then divides up the shares among bidders.

Unsubscribed IPO

IPO oversubscription

It is said an IPO oversubscribed when the number of shares that investors want to buy is higher than the number of shares available in the stock exchanges. To put it simply, oversubscription occurs when the number of shares supplied by a company is not enough to meet the demand.

When a company decides to go public, underwriters assess the market to gauge the potential interest of the investors. During this process, there is always a chance of underwriters underestimating the interest in the IPO and price it lower than the market would actually pay for. This result in the demand for shares exceeding the number of shares issued. For example, a fixed number of shares offered in an IPO is, say, 10,000 shares. A ten-time oversubscription means investors’ demand is about one lakh shares. If the demand for an IPO exceeds the supply, the issuing house can charge a higher price resulting in more capital raised for the issuer.

In this scenario, underwriters can exercise the greenshoe option. The greenshoe option allows underwriters to issue 15% more shares than officially planned.

How Are Shares Allotted When An IPO Oversubscribed?

Every subscriber has encountered a situation where an IPO oversubscribed. So, let’s take a look at how companies allot shares in such times.
The allotment of shares is done by predefined rules laid down by Securities and Exchange Board of India (SEBI).
In every IPO, investor categories are distinguished and a percentage of shares are allotted to every category.

The process of allocating shares is different for every investor category. While 50% of shares are allocated to qualified institutional investors, nearly 35% of the shares are allotted to retail investors.

Greenshoe Options

Underwriters play a crucial role in this case. Since they work on a percentage basis, underwriters want IPOs to rise as much as capital as possible. So, if the stock price surges, underwriters buy extra stock from the company — up to 15% — and sell it to the public at a profit. Underwriters usually buy stock at a predetermined price. On the other hand, if the price is dipping, they buy back shares from the public. This option helps stabilize the pricing of the share without incurring any loss to the investors.

LISTING FORMALITIES

Once the bidding process is over, the underwriter or the investment banker checks if the issue has been oversubscribed or undersubscribed.
If it is oversubscribed, the banks release the shares at the highest price band. The share is then listed.

VERIFYING ASBA

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