An initial public offering, or IPO, is when a private firm initially makes fresh shares of stock available to the general public. From being privately owned, the corporation is now transferring ownership to the general public.
First, let's clear up the fundamentals:
- In an IPO, you must place a bid on the shares to purchase them. The Securities & Exchange Board of India, or SEBI, oversees the whole procedure.
- You are given shares if your offer is approved. In the event of an oversubscription, you will get a refund if shares are not allocated.
- You become a shareholder of the firm if you take part in an IPO and purchase equity.
- As a shareholder, you have two options for financial gain: either you may sell your shares at a profit on the stock market, or the firm will pay you dividends on the shares you own.
- Companies must meet stringent requirements and rules to get SEBI's (Securities Exchange Board of India) clearance to launch an IPO.
All retail investors are welcome to participate in IPOs. Anyone applying via a broker is eligible.
But why do businesses believe that IPOs are the best way to generate capital? First, of course, giants like Flipkart, IKEA, Dell, and others are still owned privately by a small number of investors. Even if this could be the case for certain businesses, not all businesses have the financial means to obtain adequate capital from private investors. Additionally, going public has advantages beyond just generating money. These are the reasons for upcoming IPOs.
Demand For An IPO
- An IPO aids in determining how the general public feels about a company's future. Additionally, it provides a way out for private investors, who may either sell their shares at enormous gains or just watch their net worth increase dramatically as the value of the shares rises.
- The primary justification for corporations choosing to issue shares via an IPO is the simple access to enormous amounts of money. Nothing compares to money that comes from individuals. In addition, a company's legitimacy is increased by being listed on a stock market, which is helpful in various situations. Finally, the corporation is seen as responsible because its hundreds (and thousands) of shareholders want it to be accountable.
- It offers the business significant bargaining power when negotiating loan conditions, loan interest rates, and mergers and acquisitions. Listed firms may get cash via loans at a lesser cost, or a lower interest rate. To include valuable firm shares in the trade arrangement, mergers and acquisitions are enabled.
- The regulatory body, in this case, is SEBI, as was already said. Before firms' planned IPOs may be opened for public investment, it verifies that the requirements and standards are satisfied. What standards and requirements must businesses meet? Let's look at it.
Prerequisites For IPO Filing
The following are the requirements set out by SEBI for firms wanting to submit an IPO.
- In the previous five years, the firm should have generated an operating profit of at least 15 crores for at least three of those years.
- In each of the previous three years, the corporation should have had net tangible assets (defined as physical assets + monetary assets) of at least Rs 3 crore. excludes virtual assets having varying values, such as shares.)
- Even if these requirements are not met, the firm may nonetheless submit a request to SEBI for authorisation of an IPO. However, the IPO may only proceed through the book-building approach to get such approvals, in which case 75% of the shares must be sold to Qualified Institutional Investors (QII). For the sale of stocks under the IPO to be regarded as legitimate, this must be completed. In addition, any funds raised must be refunded if the IPO is not approved.
- The size of the IPO cannot be more than five times the firm's value.
- The goal of SEBI is to safeguard investors' interests while ensuring that regulations aren't so onerous as to deter potential businesses from achieving development.
The newly issued public stock is then finally listed on the stock market after the completion of the IPO. After that, a transaction in the publicly held shares on the stock market is permitted. If you choose the appropriate IPOs, you stand to earn very significant returns on your investment as an investor.
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