The IPO Markets - Part 2

The IPO Markets - Part 2

5.1 - Overview

This is extremely important to know because the IPO market, also called the Primary market

sometimes attracts companies offering their shares to public without actually going through a 

healthy round of funding in the past.

Of course you need to treat this with a pinch of salt 

but nevertheless it acts as an indicator to identify well run companies.

5.2 - Why do companies go public?

The promoter has 3 advantages by taking his company public..

1.He is raising funds to meet Capex requirement

2.He is avoiding the need to raise debt which means he does not have to pay finance charges 

which translates to better profitability

3.Whenever you buy a share of a company, you are in essence taking the same amount of risk as the promoter is taking.

when the company goes public, the promoter is actually spreading his risk 

amongst a large group of people.

There are other advantages as well in going for an IPO…

1.Provide an exit for early investors

Any existing shareholder of the company – could be promoters, angel investors, venture capitalist, PE funds; can use this opportunity to sell their shares in the open market.

2.Reward employees –Employees working for the company would have shares allotted to them as an incentive.

3.Improve visibility - Going public definitely increases visibility as the company has a status of being publicly held and traded.

5.3 - Merchant Bankers

Having decided to go public, the company must now do a series of things to ensure a successful 

initial public offering. The first and foremost step would be to appoint a merchant banker. Merchant bankers are also called Book Running Lead Managers (BRLM)/Lead Manager (LM). 

The job of a merchant banker is

• Conduct a due diligence on the company filing for an IPO, ensure their legal compliance and 

also issue a due diligence certificate

• Should work closely with the company and prepare their listing documents including Draf Red 

Herring Prospectus (DRHP). We will discuss this in a bit more detail at a later stage

• Underwrite shares – By underwriting shares, merchant bankers essentially agree to buy all or 

part of the IPO shares and resell the same to public

• Help company arrive at the price band for the IPO. A price band is the lower and upper limit of 

the share price within which the company will go public. In case of our example, the price band 

will be Rs.1562/- and Rs.1875/-

• Help the company with the road shows – This is like a promotional/marketing activity for the 

company’s IPO

• Appointment of other intermediaries namely, registrars, bankers, advertising agencies etc. The Lead manager also makes various marketing strategies for the issue

Once the company partners with the merchant banker, they will work towards taking the company public.

5.4 - IPO sequence of events

• Appoint a merchant banker

• Apply to SEBI with a registration statement

• Getting a nod from SEBI

• DRHP-

A DRHP is a document that gets circulated to the public. Along with a lot of information, DRHP 

should contain the following details..

a.The estimated size of the IPO

b.The estimated number of shares being offered to public

c.Why the company wants to go public and how does the company plan to utilize the funds 

along with the timeline projection of fund utilization

d.Business description including the revenue model, expenditure details

e.Complete financial statements

f.Management Discussion and Analysis – how the company perceives the future business operations to emerge

g.Risks involved in the business

h.Management details and their background

 •Market the IPO- TV and print advertisements

• Fix the price band 

• Book Building –

The process of collecting all these price points along with the respective quantities is called Book Building.

• Closure-This price point is usually that price at which maximum bids have been received.

• Listing Day-This is the day when the company actually gets listed on the stock exchange. The listing price is the price discovered through the book building process.

5.5 - What happens afer the IPO?

This whole system around the date of issue where one bids for shares is referred to as the Primary Market. The moment the stock gets listed and debuts on the stock exchange, the stock starts to trade publicly. This is called the secondary markets.

Once the stock transitions from primary markets to secondary markets, the stock gets traded daily on the stock exchange. People start buying and selling the stocks regularly.

5.6 Few key IPO jargons

Under Subscription –company wants to offer 100,000 shares to the public but 90,000 bids were received.

Over subscription – If there are 200,000 bids for 100,000 shares on offer then the issue is said to be oversubscribed 2 times (2x)

Green Shoe Option-

This is also called the over allotment option

 additional shares (typically 15 percent) to be distributed in the event of over subscription.

Fixed Price IPO –Sometimes the companies fix the price of the IPO

 Price Band and Cut off price –Price band is a price range between which the stock gets listed. For example if the price band is between Rs.100 and Rs.130, then the issue can list within the range. Let’s says it gets listed at 125, then 125 is called the cut off price.

Recent IPO’s in India

 

Key takeaways from this chapter

1.Companies go public to raise funds, provide an exit for early investors, reward employees 

and gain visibility

2.Merchant banker acts as a key partner with the company during the IPO process

3.SEBI regulates the IPO market and has the final word on whether a company can go public 

or not

4.As an investor in the IPO you should read through the DRHP to know everything about the 

company

5.Most of the IPOs in India follow a book building process