The IPO means initial public offerings. For this, companies offer themselves to sell their shares in the stock market and offer to sell their shares to the investors. To raise the business or to meet its other expenses, the company raises the funds in a number of ways. For the first time, the process of unloading among the common people is called the Initial Public Offering (IPO) offer. Many times the government also brings IPO under the policy of disinvestment. In this case, some shares in a government company are sold to the people through shares.
Process of IPO:
IPO can be fixed in either fixed price or book building or both ways. The price at which the shares are presented in the fixed price method is already decided. In book building, the scope of the price is fixed for the shares within which the investors have to bid. The help of the booker is taken for fixing the price band and completing the bid. Booker’s job usually involves a company specializing in investment banks or securities matters.
How is the price fixed: The price of the IPO is decided in two ways.
Price Band and Second Fixed Price Issue
Price Band (IPO):
Most companies, who are allowed to bring IPO, can decide the price of their shares. But companies from infrastructure and some other sectors have to get permission from the Reserve Bank of India for the SEBI and the banks. The company’s board of director, along with booker, sets price band together. In India, 20 percent price band is allowed. This means that the maximum limit of the price band can not exceed 20% with floor prices.
After the band price is set, the investor can bid for any price. The bidder can also set a cutoff bid. This means that if any finality is finalized, they will buy so many shares on it. After the bid, the company decides a price where it feels that all its shares will be sold.
Capital of IPO:
The amount invested by the investors in the IPO goes directly to the company. However, in case of disinvestment, the amount received from the IPO goes to the government. Once the shares are allowed to be traded, the shareholder has to bear the profits and losses from the purchase and sale of shares. If the company needs other relevant information related to the IPO, the Qualified Institution Buys (QIB) has sufficient information about the company, while the retail buyers can not gather enough information about the company.