A company can raise funds through debt, equity or through its own retained earnings. One of the ways through which a company uses equity to raise money comes under Initial Public Offering (IPO). An IPO converts a privately-held company into a public company by selling its shares to the public for the first time. Thus, IPO is a process through which a company becomes listed on the market and sells its equity to raise funds.
Retail investors, institutional investors and high net worth individuals (HNIs) can access this IPO and buy shares of the company. Once the company becomes listed after the IPO, the shares of the firm can be traded freely in the open market. When you are applying for an IPO, you cannot apply for any number of shares of your wish. You can only apply in lots in an IPO. The number of shares within a lot is determined by the company whose IPO is being rolled out.
Types of IPO
Fixed Price Offering
In this type of offering, the investor is aware of the price at which the securities can be bought. This price is fixed in nature. The demand for the shares offered will be known only at the end of the issue. Payment for the shares bought is done at the time of subscription.
Book Building Offering
Unlike Fixed Price Offering, here the investor is unaware of the exact price of the securities issued. The IPO is initiated with a 20% price band on the securities. Thus, it has a floor price (lowest value of the band) and cap price (highest value of the band). The investors have to specify the price at which they buy that definite number of shares. The final price at which shares will be sold is determined by the investors’ bids of price and quantity.
When a company issues shares for subscription, it receives applications from the potential buyers. When that company receives applications for shares more than the number of shares it has offered, it is referred to as over-subscription of shares. In simple terms, oversubscription occurs when the demand for shares is more than the shares offered in the company’s IPO.
Example: Suppose a company ABC offers 10,000 shares in their IPO but they receive one lakh applications for share purchase. This case will be referred to as a ten-time oversubscription of shares. Simple, demand for shares is 10 times more than what is offered.
When a company receives applications for shares less than the number of shares it has offered, it is referred to as under-subscription of shares. Thus, under-subscription occurs when the demand for shares is less than the shares offered in the company’s IPO.
Example: Suppose a company XYZ offers 10,000 shares in their IPO but they receive 5,000 applications for share purchase. The supple of shares from the company is more than what is demanded. In simple terms, under-subscription signifies that demand for shares is underwhelming and investors are not much keen towards the IPO of company XYZ.
Example of an IPO
The following table gives you the details of Happiest Minds Technologies IPO.
|IPO Date||Sep 7, 2020 – Sep 9, 2020|
|Issue Type||Book Built Issue IPO|
|Issue Size||42,290,091 Eq Shares|
|Market Lot||90 Shares|
|IPO Price||Rs. 165 to Rs 166 per equity share|
|Min Order Quantity||90 Shares|