IPO Basics

What is an IPO?

A private company opens its shares to public shareholders for the first time through the stock exchange system in an Initial Public Offering (IPO). The transition enables the company to obtain money from investors while achieving public stock exchange listing status.

An Initial Public Offering happens in the primary market because it establishes new security issues that directly connect investors. After the allotment of shares, the public can trade them on the stock exchanges NSE and BSE in India as part of the secondary market.

Why Do Companies Go Public?

There are various fundamental reasons that motivate businesses to conduct an IPO. Here are some key motivations:

1. Raising Capital for Growth

New funds must be obtained by every company that wants to grow. Companies obtain their initial funding from three private sources, including:

• Self-funding (bootstrapping), family, and friends
• Angel Investors
• Venture Capitalists (VCs)
• Private Equity (PE) Firms
• Bank Loans

After using up their available private funding sources, companies select the initial public offering (IPO) as their last resort to acquire substantial funds while avoiding debt accumulation.

2. Through an IPO, organizations allow their initial investors to sell their stocks

The Offer for Sale (OFS) enables VCs and PE firms to sell their shares in order to profit from their company investments.

3. Debt Repayment

Organizations that carry substantial debts commonly use IPO funds to pay down their debt since it enables them to evade costly interest payments and enhance their overall financial stability.

4. Increasing Brand Visibility & Credibility

Barriers such as increased media attention, along with enhanced investor trust and credibility, arise from listing a company in the public domain. The organization's presence becomes more appealing to both partners and customers and new workforce applicants.

5. Encouraging Employee Retention

Companies generally introduce Employee Stock Option Plans (ESOPs) through IPOs to enable employees to gain economically from organization's, expansion.

Types of IPOs

Both larger and smaller IPOs exist within the IPO marketplace.

1. Mainline IPO (Mainboard IPO)

Large established companies with financial strength perform the issue.

The required amount of paid-up capital must reach at least ₹10 crore after the new issue period.

SEBI (Securities and Exchange Board of India) reviews all IPOs thatorganization's are being released.

The exchange-listed company must publish quarterly reports while being registered on NSE/BSE.

2. SME IPO (Small & Medium Enterprises IPO)

These IPOs appear from businesses that are both small and start-up-focused.

A maximum paid-up capital of ₹25 crore can exist following the issue.

Stock exchanges perform the review of IPO documents instead of SEBI performing this duty.

This platform lists companies on the thatNSE Emerge/BSE SME platforms that provide flexible compliance procedures.

Key Differences:

Advantages of IPOs

For the Company

• The large capital obtained through IPOs gives the company the freedom to expand its operations while investing in research and development as well as marketing initiatives and new infrastructure construction.
• The money acquired through IPO operations does not need repayment because they lack repayment requirements similar to loans.
• Publicly traded companies procure strong partnerships and achieve a the better reputation because of their increased brand value.
• Employees tend to stay within a company because ESOPs serve as an effective talent retention tool.
• Public market forces set the official value of companies during market valuation periods.

For Investors

• The application process for IPOs requires no investment costs since they avoid brokerage fees.
• The potential to buy shares ata an IPO price stands as an initial investment break because successful stock performance can bring profits.
• Quick profits remain possible when your company operates as a premium listing.
• Through the Red Herring Prospectus (RHP) SEBI maintains full visibility of financial data disclosed by IPO companies.

Disadvantages of IPOs

For the Company

• The expense of IPOs consists of substantial costs due to administrative fees as well as underwriting expenses, and legal expenses.
• The value of promoters' equity stake diminishes because of share dilution.
• Public companies at the regulatory compliance level must show their financial and operational information on a regular basis.
• Investors demand both performance stability along atsteady profitability from companies in the post-IPO period.

For Investors

• Joining an IPO that receives excessive applications brings the danger that investors will not succeed in obtaining allotment.
• Poor stock listing risks occur when some IPOs start trading at lower prices than initial expectations, thereby causing investor losses.
• Stock market prices show continuous fluctuation based on how market participants feel about particular companies as well as their actual performance.

IPO Investment Process

Step 1 entails studying the prospectus known as the Red Herring Prospectus (RHP).

The RHP reveals financial records with business details coupled with IPO risks and objectives about the release company.

Step 2 demands that investors select both a Demat and a Trading Account for their operations.

You require a Demat account and a trading platform that needs to be linked to a bank account.

Step 3: Apply for the IPO

The application process for IPOs exists through three channels which include UPI-based ASBA (Application Supported by Blocked Amount), Net Banking (ASBA), and Brokers and stock trading apps (Zerodha, Upstox, Groww, etc.).

• UPI-based ASBA (Application Supported by Blocked Amount)
• Net Banking (ASBA)
• Brokers and stock trading apps (Zerodha, Upstox, Groww, etc.)

Step 4: IPO Allotment & Listing

Your Demat account receives the IPO shares whenever they are allotted to you.

The stock marketplace lists the new securities after completing the allocation period.

FAQs About IPOs

1. Who can apply for an IPO?

A person needs to have a Demat account and a PAN card as well as a bank account, in order to participate in the IPO registration process.

2. How do I check IPO allotment status?

To check your IPO allotment status, you should visit the website of the IPO's registrars.

In order to check IPO allotment status, use the website of the registrar (Link Intime, KFintech, etc) or the BSE/NSE website pages. You can also check it from the ipo ji app and website.

3. What defines an IPO Grey Market Premium (GMP),, and how does it work in the public market?

The unofficial premium value that IPO shares trade on the grey market ahead of their listing date is known as GMP.

4. What happens if an IPO is oversubscribed?

The distribution of stocks during an oversubscribed IPO follows a random selection process.

The lottery system controls share distribution when an IPO exceeds its subscription limit.

5. Does the public have the ability to sell IPO shares during the stock exchange listing?

Asked specifically about selling available IPO shares at the time of their initial public listing day, and the answer is yes. You have the chance to make fast gains when an IPO lists at a higher price than the issue price.

6. When should I maintain my ownership of IPO shares?

It depends on your strategy:

• People should sell their IPO shares during the short term if the initial listing occurs at a beneficial market value.
• In case the firm demonstrates strong fundamentals, you should keep shares for wealth accumulation.

People who select their IPO investments carefully will usually achieve profitable results. Before investing, you must research the company risks alongside ensuring your financial objectives match your investment decisions. Your decisions will benefit from regular updates regarding IPO headlines alongside GMP direction and market understanding.

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