What is an IPO?

'IPO' you might have heard this word quite a lot especially in the last two months. In this article I will explain you the meaning of IPO and its relevance.

In a layman's language an initial public offer or an IPO is the first time when a company issues shares to Public. Before an IPO a company generally has few shareholders but when it decides to get listed on a stock exchange and to go public it takes the route of IPO. During an IPO the company opens its shares for the sale to public. As an investor one can buy the shares directly from the company and become a shareholder of that company.

So let us not discuss various investor categories when it comes to initial public offers. These include the following

• Qualified institutional buyers
• Non-institutional investors
• Retail individual investors

A very important point about IPO what happens when the demand for the IPO is greater than the allocation i.e. the number of shares issued are less as compared to the subscription of that shares it is known as oversubscription. In the case of oversubscription, the computerized process ensures impartial allocation to the investors.

Now the question arises that why a company goes public through an IPO. The following are the reasons behind company going public.

• To raise capital for growth and expansion
• To allow the early investors to sell their stake

Steps in the process of IPO issue

• The first step in the IPO process is selecting an investment bank. An investment bank acts as an underwriter. It also acts as a facilitator in the IPO procedure.
• The Next step is to create a red herring prospectus. A red herring prospectus includes various information about the company -the future plan of the company,how the IPO money would be utilized, various ratios of the company, the potential risk in the market and expected share price range.
• And the next and of one of the most important Step is the approval from SEBI. If the securities and exchange Board of India is satisfied with the IPO details and the prospectus presented to them then it will approve the said IPO or in the other case it will ask to make the changes before the prospectus can be shared with the public investors.
• The Next step is the approval through stock exchange. BSE stands for Bombay Stock exchange which has a listing department who takes care of the approval for securities of companies the BSE. BSE has a list of criteria which needs to be followed for a company to get listed on it.
• The next step in the procedure of IPO is the subscription of shares by the general public and other investors. After completing all the formalities investors who wish to apply for the share have to fill out and submit the IPO application through an online process nowadays.
• The next one is the allocation of shares to the subscriber and then the listing of shares of that particular company on the stock exchange. Once IPO applications are received, the shares get credited to investor's demat account. In case of oversubscription, investor may not get the number of shares originally wanted. In case any investor is not granted any share his amount will be refunded.