ALL ABOUT INITIAL PUBLIC OFFERING
Initial Public offering as the name says It is “Initial offer” which means first time a company raises capital through public. Every company needs capital and there are three major sources to raise capital those are:
1.Through company’s own profit or retained earnings
2.Loans taken from banks or other debts taken
3.By selling its existing shares to public in exchange of money
When a Company sells its shares to investor and investor in return gives money to the company this transaction is called as “Primary Market”. Money received in this market is then directly used by the company for its respective objectives.
Question arises here, why does the company raise capital? It may be because of the following reasons:
1.To expand its business
2.To reduce existing loan and debts
3.To reducing existing promotors stake
So How does the IPO process work
Company firstly identifies the requirement of their capital, once capital is finalized, a company with merchant banker and investment consultant finds out the best price for the shares and number of portions in which entire capital will be divided, and thus factors like Price Band, Market Lot and Issue size comes into existence.
After this Company approaches regulatory bodies in the stock market which is primarily SEBI and other government Institutes, who approves the process of IPO for the Company. Various factors are considered by these institutes before approving any IPO: the past performance of the company, net worth, profitability, legal obligation and factor which protect the rights of the investor, etc.
Once the company receives approval it starts promoting and announcing about IPO with help of a red hearing prospectus among the investor group where they provide all necessary information to understand the company and its future prospects to create interest in the investor’s mind.
Prospectus company announces the date of issue and other details and allows you to invest only within 3 days for a particular month. You can apply for IPO & once you apply, your funds in the bank get blocked for a certain time period. The amount is released after finalisation of the allotment process, if you have not been allotted the IPO, your funds get released within 6 to 7 days and if you are lucky enough to get an IPO your shares will be reflected in your Demat account, and thus you become a shareholder of the company.
Once Company receives these funds from investors, company gets listed on stock market, and then any Investor (Shareholder) can buy and sell shares from other investor, this is called “Secondary Market” wherein there is no direct relation between company and secondary market share price.
This is how a private company becomes public or listed company for the benefit of both investor and the company.
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