Initial Public Offerings

LIC recently went public on 4th May, with the biggest IPO seen by SEBI, offering up 221,374,920 shares of ₹10, aggregating up to ₹21,008.48 Crores.

But this brings up the question – what is an IPO, and why is it such a big deal?

An IPO or an Initial Public Offering is the process of offering shares of a private corporation to the public in a new stock issuance. This is essentially a way for a private company to raise funds from the public by selling parts of their company.

This allows the company to list itself on the stock exchange as well.

Before an IPO, the company’s funds come from a small pool of people, such as partners, friends and family, venture capitalists, and angel investors. Upon going public, the company has access to a much larger source of funds, allowing faster growth and expansion. The added transparency with accounts and a successful IPO also aids in increasing the company’s credibility, allowing for an added factor to their growth.

Some benefits of an IPO

An IPO has several benefits for the company, along with allowing an inflow of increased capital and funds. Some of them are:

• By allowing the public to see the company’s documents and accounts, it promotes transparency and credibility, enabling further growth in customers.

• There is diversification and broadening of the shareholder base.

• Existing investors are provided an exit from the company.

• A listed company can raise share capital for growth and expansion in the future through a follow-on public offering or FPO.

IPOs in India

When coming with an IPO, the company has to file its offer document with the market regulator Securities and Exchange Board of India (SEBI). The offer document contains all relevant information about the company, its promoters, its projects, financial details, the object of raising the money, terms of the issue, etc.

Now, SEBI has some criteria that a company must meet in order to go public, including:

· Net tangible assets of at least Rs 3 crore

· Net worth of Rs 1 crore in each of the preceding three full years

· Minimum average pre-tax profit of Rs 15 crore in at least three of the immediately preceding five years.

Types of Investors

To invest, one has to be 18 years of age and have a brokerage account.

There are various categories of investors who can invest in an IPO.

• Qualified institutional buyers (QIBs): foreign portfolio investors (FPIs), mutual funds, commercial banks, insurance companies, pension funds, etc.

• Retail investors: All individuals who invest up to Rs 2 lakh in an issue.

• High net worth individuals: Retail investors investing above Rs 2 lakh.

- Siya Heda

Sources:

• https://www.investopedia.com/terms/i/ipo.asp#toc-how-an-initial-public-offering-ipo-works

• https://www.chittorgarh.com/ipo/lic-ipo/1221/

• https://indianexpress.com/article/explained/everyday-explainers/everyday-economics-ipo-initial-public-offering-7775437/