IPO (Initial Public Offering)
- Initial Public Offering refers to the offering of a company’s equity to the public.
- In an initial public offering, the issuer, company that is raising capital, procures the assistance of an underwriting firm or investment bank, to help determine the best type of security to issue, offering price, amount of shares and the timeframe for the market offering.
- An IPO can be either oversubscribed or under subscribed. When an IPO is oversubscribed the allotment to the subscribers is done on a pro rata basis wherein allotment is given on the basis of shares issued to them.
- When an issue is under subscribed, the allotment is done is full and for the shares that remain under subscribed are taken by the underwriters or the book running lead managers. They have a pre determined liability to take and are paid a consideration in return of the services provided.
- A company needs to file a Red Herring Prospectus to the Regulator and once it is approved, the company can go for an IPO.
Types of Issue
- Fixed Price Issue- The issue is offered at a fixed price. It is decided in advance by the company.
- Book Building Issue- Book Building is an efficient price discovery mechanism which helps to decide the price of the security to be issued. The bids are collected at various prices which can be above or equal to the floor price. The offer price is determined after the closing date. A price band is set and the bids are made between that price band.
Application And Allotment in IPO
An application can be done through ASBA. It authorizes the bank to block an amount equal to the application amount. The amount remains blocked till the end of allotment process. On allotment the amount would be debited and in case of partial or no allotment, the amount not used would be released back.