16 FAQs of IPO – A key to successful investing through IPO

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IPO stands for the initial public offering. Any company who wishes to draw money from the public at large, do so through IPO. Here is the list of 16 most frequently asked questions for any novice investors willing to enter the market through IPO route.

1. What does IPO mean?

IPO stands for the initial public offering. It is way by any company raises the money from the people. It is done on very first time. The raise amount can be used in various activities like company expansion, payment of the loan, infrastructure building or rebuilding and get listed in the primary stock market. In the other words, we say that through initial public offering the company sells its securities to people and listed into primary market. Plus before this, the company is the private limited company.

2. What does “going Public” mean?

When any company raises money through initial public offering (IPO). This can be used in any purpose like the business expansion. This is called “Going Public “.By issuing initial public offering the company gets converted from private limited company to public limited company.

3. How are IPO investors benefited?

The initial public offer gives a chance to the investors to purchase the share of any company. The investor buys the shares directly from the company at the price of their choice. But any time there is a huge price gap between the prices of share offered by the company. And the prices at which investor are ready to buy any share of that company. In this way sometimes the investor gets huge benefit during the time of listing.

4. What are benefits of getting listed through IPO?

If you think in term of the company then listing through initial public offering provides many benefits like company come to know the actual total value of the company, which is decided by many millions of investors once it is listed in the stock market. Plus company gets funds which can be used for the business expansion or repayment of previous borrowings.

5. What is Price band?

It is a value setting method. Through this, the seller indicates the upper and lower cost range between which any buyer of the issue can place the bids for the issue. Let’s take an example for an IPO of ABC company the price band for the share is set at Rs 320 to Rs 350. It means that the more by of the issue can bid at least Rs 320 for the issue.

6. What is face value?

Face value is also called par value. It is nothing but the legal capital of each share of the stock. Face value or Par value has no correlation with the market value of stocks. If any IPO has the final price of Rs 100. Out of Rs 100 face value of the issue is Rs 10 and rest is called Premium.

 Total share Price=Face value + Premium

 7. Who decides the “Price band”?

When any company plans to launch an initial public offering. They always hire a lead manager. This can be the merchant bankers also. The lead manager of any initial public offerings decides the price or price band of an initial public offering. The capital market regulatory body that is SEBI or stock exchange in which the initial public offering would be listed does not play any role in deciding the Price band of an initial public offering.

8. What is the role of SEBI in Initial Public Offering?

The purpose of the capital market regulatory body that is SEBI is to validate the content of initial public offering prospectus.

9. What is the process of deciding the Price band?

For deciding the prices band of any initial public offering the company and the lead manager which is hired by the company. Does the deep market research. Depending upon the market research the lead manager decides the price band.

10. What are risks in deciding the Prices band?

If any company and its lead manager decide the price band of any initial public offering at higher prices. In that, there are many risks involved in it like. Due to high price the investor the investor does not subscriber the initial public offering. In some cases, if the investor does not like the company, in that case, the issue gets undersubscribed.

11. What does the company do if the IPO does not perform very well?

There are many cases in which the initial public offering (IPO) offered by the company is either unsubscribed or undersubscribed. In that case, the company revises the price band of the initial public offering or get suspend the initial public offering.

12. Who decides the date of issue?

After the approval of draft prospectus from both exchange and SEBI, the company takes the final call on when to launch the issue. For deciding the launching date and duration. The company does the consultation with the issue Registrar, issue lead manager and the stock exchange in which the issue get listed.

13. What is the role of Registrar?

Registrars are the independent bodies which are register with SEBI and stock exchanges. They are having many responsibilities during the launching of an issue like the process of issue application, allotment of issue based on the SEBI guidelines, refund through ECS, Cheques, allotment of shares in the demat account of the investors.

14. What is the role of Lead Manager?

They are the independent financial institutes. Usually, the company who is planning to go public hier them. They too have many responsibilities including the following –

  • helping the company in drafting the IPO documents,
  • does the deep market research for the issue,
  • get clearance of the draft prospectus with SEBI,
  • prepare the roadmap of an issue,
  • get clearance from the listing exchange,
  • decide the price band of the issue.

15. Difference between primary market and secondary market?

Primary Market- A primary market is a market where the company offers the company shares first time to the investors in order to raise the fund or to get listed.

Secondary Market – A secondary market is a market where the share starts on trading on any exchange post listing.

16. Difference between fixed price issue and book building issue?

Fixed Price Issue

  1. Here the investors knew the offer or allotment prices in advance.
  2. The actual demand of the issue is made public only after the closure of the issue.
  3. You need to pay during the time of subscription

Book Building Issue

  1. Here the investors did not know the offer or allotment prices in advance.
  2. The actual demand of the issue is made public only after the closure of the issue.
  3. You need to pay during the time of allotment.

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