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Primary Market/ IPO

(Primary Market) The primary market is where securities are created. It’s in this market that firms sell (float) new stocks and bonds to the public for the first time.

It issues new securities on an exchange for companies, governments and other groups to obtain financing through debt-based or equity-based securities.

(IPO)Initial Public Offer: –

An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded.

An IPO is also referred to as a public offering. When a company initiates the IPO process, a very specific set of events occurs. It is given below.

  • An external IPO team is formed, consisting of an underwriter, lawyers, certified public accountants (CPAs) and Securities and Exchange Commission (SEC) experts.
  • The financial statements are submitted for official audit.
  • The company files its prospectus with the SEC and sets a date for the offering.

It can be a risky investment. Because the investor will invest their money based upon little historical data. And predict that, the company will perform well in near period of time or in future.

(Book building) Book building is a systematic process of generating, capturing, and recording investor demand for shares during an initial public offering (IPO), or other securities during their issuance process, in order to support efficient price discovery.

In other words, it is a process to determine the price of the IPO based on demand of institutional investor.

(Eligibility to issue Securities)

  • Paid Up Capitals: The paid up equity capital of the applicant shall not be less than  10 crores * and the capitalisation of the applicant’s equity shall not be less than  25 crores**.
  • Conditions Precedent To Listing:
    The Issuer shall have adhered to conditions precedent to listing as emerging from inter-alia from Securities Contracts (Regulations) Act 1956, Companies Act 1956, Securities and Exchange Board of India Act 1992, any rules and/or regulations framed under foregoing statutes, as also any circular, clarifications, guidelines issued by the appropriate authority under foregoing statutes.
  • At least Three year of track records
  • It should satisfy the exchange rule given in below.
    • No disciplinary action by other stock exchanges and regulatory authorities in past three years
    • Redressal Mechanism of Investor grievance
    • Distribution of shareholding
    • Details of Litigation
    • Track Record of Director(s) of the Company

IPO is up two types:  Fixed Price and Book Building

Under fixed price,

  • The company going public determines a fixed price at which its shares are offered to investors.
  • The investors know the share price before the company goes public.
  • Demand from the markets is only known once the issue is closed.
  • To partake in this IPO, the investor must pay the full share price when making the application.

Under book building,

  • The company going public offers a 20% price band on shares to investors.
  • Investors then bid on the shares before the final price is settled once the bidding has closed.
  • Investors must specify the number of shares they want to buy and how much they are willing to pay.
  • Unlike fixed price, there is no fixed price per share.
  • The lowest share price is known as the floor price, while the highest share price is known as the cap price.
  • The final share price is determined using investor bids.

Allotment of shares:

  • In business, is meant to describe a systematic distribution of resources across different entities and over different time periods.
  • In finance, allotment is normally related to the distribution of shares during a public share issuance.

Reason for allotment of shares:

New shares can be issued to repay a public company’s short- or long-term debt. This helps a company with its interest payments and changes key financial ratios such as the debt-to-equity ratio and debt-to-asset ratio.

Basic of Allotment:

  • After the closures of the issue, the bids received are aggregated under different categories i.e., firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs), Retail, etc.
  • The over subscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document.
  • Within each of these categories, the bids are then segregated into different buckets based on the number of shares applied for.
  • The over subscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined.
  • Then, the number of successful allottees is determined.

(Private Placement)

  • A selected few number of investors invest money in this securities.
  • Basically used for raising capitals.
  • Investors involved in private placements are usually large banks,mutual funds, insurance companies and pension funds.

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