Initial public offering (IPO)
The Initial public offering is a process by which the company offers its shares to the public for the first time. After the IPO, the company gets listed on the stock exchange and will become publicly traded in NSE and BSE. The Initial public offering is a milestone for a company as it supplies an opportunity for exponential growth, liquidity for existing investors, and raising capital.
IPO enables a pot full of opportunities for the company to expand and reach higher highs. Investing in the IPO of a company involves considerable risk and high rewards. Investors can generate high profit/loss in the short term depending on the company’s listing gain or loss.
what are the IPO requirements for a company
- The Business must have an age of at least three years – As per the SEBI eligibility criteria for an IPO; the company must be at least three years old.
- Minimum NetWorth of 1 crore – For each of the previous three years, the company’s net worth (assets – liabilities) must be at least one crore.
- Loan Default: On behalf of the company, there shouldn’t be any defaults on any loans or other credit lines.
- Issue Size: A company’s total issue size shouldn’t exceed five times its net worth.
- Operating Profit: The company’s past three years’ operational profit must have an average of at least Rs. 15 crores.
- Name change -If the Business has changed its name during the past year. It must have generated at least half of its total annual income from the activity represented by the new name.
- Paid-Up Capital: Partly paid-up shares shouldn’t be considered along with the equity of a firm that plans to go public.
What is a Listing Gain in IPO
Listing gain is the gain made by investors when the listed price of the stock on a stock exchange is greater than the issue price. In an initial public offering, the shares of a company are issued to eligible investors. Investors will gain a listing gain when the listing price exceeds the issue price when shares get officially listed on a stock exchange. The profile and fundamentals of a company and investor sentiment will influence the listing price of a stock.
For example, imagine Invest Wild heading for an IPO (Initial Public Offering) and announcing Rs 100 for a share. Mr. Subodh is a retail investor interested in buying the shares during the IPO.
Mr. Subodh applied for the share during the IPO for Rs 100. On the listing day of Invest Wild’s share on the stock exchange, the listing price of the share was 150. Invest Wild gets listed on the stock exchange with a listing gain due to the great fundamentals of the company and positive market sentiment. which led to a rise in demand for Invest Wild shares. Mr. Subodh can sell the shares anytime and realize the listing gains.
What is a listing Loss in an IPO?
Listing loss is the loss made by the investor when the listed price of the stock on a stock exchange is lower than the issue price. When a company’s stock gets listed at a lower price than its issue price, investors will make a loss. Mainly listing loss is influenced by a lack of demand in stock or adverse investor sentiment.
For example, As discussed earlier, imagine Invest Wild is aiming for an IPO at an issue price of Rs 100 and Mr. Subodh is an investor. Suppose, on the listing day, Invest Wild share was listed at Rs 50 on the stock exchange. Mr. Subodh will be at a loss of Rs 50 if he realizes his listing loss.
What is oversubscription in IPO
Oversubscription occurs in an IPO when the demand for shares exceeds the number of shares available. In this situation, investors get shares issued through random choice. When an IPO goes oversubscribed, there will be less probability for investors to acquire multiple lots. As the company provides more priority to issue to more investors. An oversubscription situation often shows a positive investor sentiment in the IPO, which can positively impact the company.
Oversubscription can lead to significant listing gains and create a positive outlook for the stock.
Let’s understand oversubscription in IPO with an example,
Imagine Invest Wild as a company that aims to issue 1000 shares through IPO at Rs 100. IPO is oversubscribed five times; if the company receives investor bids for 5,000 shares. In this situation, as there is positive investor sentiment for Invest wild stock, there is a potential for the stock to get listed with a listing gain.
What is under subscription in an IPO
Under subscription occurs in an IPO when the demand for shares is lower than the number of shares available. In this situation, there is a potential for the IPO to get canceled and collected money will be returned to investors. Under subscription in an IPO will be caused due to unfavorable market sentiment and poor fundamentals of the company.
Let’s understand under subscription with the same example discussed earlier. Imagine Invest Wild as a company heading for an IPO to issue 1000 shares at a stock price of 100. The IPO is undersubscribed if the company receives investor bids for 600 shares. There is potential for the company to list with a listing loss or for the IPO to get canceled.
If the IPO is not completely subscribed, what happens?
Every IPO must receive at least a 90% overall subscription to go ahead with the allotment process, according to the SEBI (Securities and Exchange Board of India). By the final day of the issue, if a company does not receive a 90% overall subscription (including the QIB, NII, and Retail categories), the IPO will be declared canceled, and all investor funds will be refunded.
i.e., suppose a company is heading to issue 1000 shares through an IPO. In that case, the company must get a bid for at least 90% (900 shares) of shares from all three categories to forward with the IPO process. Issue of Shares in an Initial public offering process includes three categories. They are Retail Individual Investor (RII), Qualified Institutional Buyer (QIB), and Non-Institutional Investor (NII).