Public issues can be classified into Initial Public offerings and further public offerings. An initial public stock offering (IPO) referred to simply as an “offering” or “flotation,” is when a company issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.
In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.
In a public offering, the issuer makes an offer for new investors to enter its shareholding family. The issuer company makes detailed disclosures as per the DIP guidelines in its offer document and offers it for subscription. Initial Public Offering (IPO ) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities.
An IPO can be a risky investment. For the individual investor, it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.
IPOs generally involve one or more investment banks as “underwriters.” The company offering its shares, called the “issuer,” enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.
How to apply to a public issue ?
When a company floats a public issue or IPO, forms are printed for application to be filled by the investors. Public issues are open for a few days only. As per the law, any public issue should be kept open for a minimum of 3days and a maximum of 21 days.. For issues, which are underwritten by all India financial institutions, the offer should be kept open for a maximum of 10 days. Generally, issues are kept open for only 3 to 4 days. The duly complete application from, accompanied by cash, cheque, DD or stock invest should be deposited before the closing date as per the instruction on the from. IPO’s by investment companies (closed end funds) usually contain underwriting fees which represent a load to buyers.
Before applying for any IPO , analyse the following factors:
1. Who are the Promoters ? What is their credibility and track record ?
2. What is the company manufacturing or providing services – Product, its potential
3. Does the Company have any Technology tie-up ? if yes , What is the reputation of the collaborators
4. What has been the past performance of the Company offering the IPO ?
5. What is the Project cost, What are the means of financing and profitability projections ?
6. What are the Risk factors involved ?
7. Who has appraised the Project ? In India Projects apprised by IDBI and ICICI have more credibility than small Merchant Bankers
How to make payments for IPOs:
The payment terms of any IPO or Public issue is fixed by the company keeping in view its fund requirements and the statutory regulations. In general, companies stipulate that either the entire money should be paid along with the application or 50 percent of the entire amount be paid along with the application and rest on allotment. However, if the funds requirements is staggered, the company may ask for the money in calls, that is, the company demands for the money after allotment as and when the cash flow demands. As per the statutory requirements, for public issue large than Rs. 250 crore, the money is to be collected as under:
25 per cent on application
25 per cent on allotment
50 per cent in two or more calls