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In this episode, we cover the most fundamental questions about IPOs. What is an IPO in the first place, and the whole process a company needs to go through before coming out with an IPO. Finally, we also understand why do companies issue an IPO.

What is an IPO and why companies go public?

This episode explains all the key terms related to an IPO. We cover everything which you must know for understanding an IPO - from Price band, Lot size, and Listing date to RHP and Grey market price, you will learn everything in this episode.

Key terms related to an IPO

Here, we understand the four main categories of investors who participate in an IPO namely, Qualified Institutional Investors, Anchor Investors, Non-institutional investors and Retail Individual Investors.

Types of buyers in an IPO

Do you often get confused if you should apply for an IPO or not? Well, not anymore! In this episode, we will help you understand the Red Herring Prospectus (RHP) of a company coming out with an IPO. We will start with basics about RHP and then cover the main segments which you must focus on.

What to look for in an RHP before investing in an IPO?

Now that we have learnt everything about an IPO, we address the most important question - How to apply for an IPO? Furthermore, we will also give you insights on how to increase your chances of getting an IPO allotment.

How to invest in an IPO?

This episode will see us clarifying all your doubts about the various charges and taxes involved in the stock market. Account charges, brokerage and transactional charges are some of the many charges we will cover. Moreover, we will also cover LTCG and STCG taxes.

Costs of investing in the stock market

This module covers everything you need to know about IPOs including the various terms associated with an IPO, types of buyers, how to read the RHP document of a company and how to invest in an IPO

All about IPOs

Introduction:<ul><li style="font-weight: 400;">Hi, hope your journey till now has been smooth. In the previous module, we spoke about what is a stock, what is the stock market, the various players in the stock market which ensure the smooth functioning of the stock market as well as the charges and taxes involved in the stock market. In this module, we will tell you everything that you need to know about Initial Public Offerings (IPOs). I am sure all of you would have heard about IPOs and the mad rush around it. Do you know which has been the biggest IPO in India so far? In 2010, Coal India came out with its IPO. The issue size was 15,200 croreswhich means that shares worth 15,200 crores were offered in the IPO. The IPO was a hit and received a thumping collection of around 2.36 lakh crores. Overall the issue was subscribed 15.2 times&nbsp;</li><li style="font-weight: 400;">&nbsp;But what is an IPO? How do companies go for an IPO and more importantly why?(These questions will come sequentially) We will talk about all this and more in this video.&nbsp;</li></ul>What is an IPO?<ul><li style="font-weight: 400;">In the previous module, we covered IPOs in brief when we talked about primary and secondary markets? We also gave examples of Zomato and Barbeque Nation to explain the concept of an initial public offering. We will introduce it here again and also talk about the process of an IPO. An IPO or an initial public offering is a process by which a privately held company offers its shares to the public for the very first time. By offering shares to the public, the privately-owned company decides toshare the ownership of the firm. Through an IPO, the company gets listed on the stock exchange where the shares of the company can be traded daily in the secondary market.</li><li style="font-weight: 400;">But how does all this happen? Generally, all companies going for an IPO appoint investment banks. Investment banks carry out the IPO process on behalf of the company. They help the company prepare a registration statement and a prospectus called a Draft Red Herring Prospectus or a DRHP. A DRHP is like an annual report of a listed company and it contains all the important information about a company&rsquo;s business. Investors like you and I need to go through the document in order to get to know the company better.&nbsp; This document is submitted to the registrar of companies and post-submission the company can make an application for an IPO to SEBI.&nbsp;</li><li style="font-weight: 400;">What happens next? SEBI then verifies the document. Post-approval the company can set the date for the IPO.&nbsp; After this, the company makes an application to the stock exchange to float its shares and attempts to create a buzz in the market by advertising the IPO in the country. Doing this helps generate interest in the IPO and attract potential investors. The company also publishes its RHP which is an extended version of the DRHP. It has the latest details about theIPO dates, price bandof the IPO &amp; the latest financial statementsof the company.&nbsp;</li><li style="font-weight: 400;">Have you ever wondered how a company figures outwhich price to float the shares at?IPOs can be priced in two ways. One is a fixed price issue and the second is a&nbsp; book building issue. In a fixed price issue the price at which the shares of the company will be sold is made known to investors in advance. How is this different from a book-building issue? In a book-building issue, thecompany offers a rangewithin which investors can bid for the shares. This range is called the price band of the IPO. Price band? Sounds familiar right? That's because most IPOs that we come across in India are book-built issues.&nbsp;</li><li style="font-weight: 400;">Normally an IPO is open for three trading dayswhich means that investors have three days to apply for an IPO. After investors have bid for an IPO, the allotment of sharestakes place at the cut-off price. What is the cut-off price? The cut-off price is the price at which shares get issued to the investors.It is the offer price finalized by the company along with the investment banks and it could be any price in the price band.Let&rsquo;s explain this with the help of an example. Let&rsquo;s say the price range for an IPO is Rs.145 to Rs. 150 per share. This is the price band of the IPO. You apply for one lot, say one lot at Rs. 147 per share. After all the applications are received, the investment decides the price at which the shares will be allotted. This is called the cut off price.&nbsp; If the determined issue price or the cut-off price isRs. 146 per sharethen you may receive an allotment of one lot at Rs. 146 per share. Alternatively, if the cut off price is Rs. 149 per sharethen you will not receive the allotment of shares.&nbsp;</li><li style="font-weight: 400;">Once the cut-off price is finalized, the company determines the number of shares to be allotted to each investor.&nbsp; </li></ul>Why do companies go public?<ul><li style="font-weight: 400;">The first reason why a company goes public is to raise money.Companies raise money to expand, invest in new projects or reduce debt.</li><li style="font-weight: 400;">The second reason why companies go public is to pay off existing shareholders.There are shareholders who own a lot of the company&rsquo;s shares and who invested in the company at an early stage. An IPO allows them to sell their shares and earn a return on their investment. In most IPOs an IPO is accompanied by an offer for sale or an OFS. An offer for sale is when the existing shareholders sell their existing shares. Hence no new shares are issued in the process and the money doesn&rsquo;t go to the company but to existing shareholders. It&rsquo;s a way for existing shareholders of the company to exit and earn some return on their investment</li><li style="font-weight: 400;">One of the reasons why companies go public is greater visibility. A successful IPO brings some credibility to a company. As mentioned earlier, the Securities and Exchange Board of India (SEBI) regulates the stock market and has laid down some strict rules to allow companies to go public. Hence, if a company is launching an IPO, people can be certain that it has passed SEBI&rsquo;s requirements</li><li style="font-weight: 400;">&nbsp;Another reason why companies go public is to increase liquidity. Liquidity is theease with which you can buy or sella company&rsquo;s shares. Let&rsquo;s say you own 100 shares of a company that is not listed on the stock exchange. If you want to sell those shares then it might be difficult to find buyers. This might lead you to sell at a lower price just so that you can attract a buyer. However, for companies listed on the stock exchange buyers and sellers have a platform to connect and transact.&nbsp; </li></ul>Conclusion:<ul><li style="font-weight: 400;">Have you ever looked at an IPO and not invested because you just couldn&rsquo;t make sense of the different terms associated with it? In the next video, we will explain the various terms that you may encounter when you invest in an IPO</li></ul>&nbsp;

What is an IPO and why companies go public?

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