Recently, LIC filed it’s Draft Red Herring Prospectus(DRHP) for mega Initial Public Offerings with the SEBI. What is an IPO? Who can invest in this? Read further to know about IPO.
We all know that LIC is fully owned by the government, and also has the biggest share in India’s insurance business.
Why did LIC filed for an IPO? Are there any conditions to invest in an IPO?
Learn more about IPO.
History of Initial Public Offerings
The publicans during the Roman Republic were the first type of business that offered shares to the public for trading (later the Roman Empire).
The publicans were similar to the governing bodies of contemporary financial institutions that held stock, just like modern stock companies.
The modern financial system, which gave IPOs their current forms, is said to have been pioneered by the Dutch.
When the Dutch East India Company offered its shares to raise additional funding in March 1602, it was the first IPO known to have ever been documented.
The Dutch East Indian Company was the first organization to issue bonds and stock to the general public from that point on, making it the first publicly traded company to be listed on a recognized stock exchange.
There exist primary markets and secondary markets.
Primary Market: In this, the scale and purchase of new (fresh) securities take place.
These includes Initial public offering ,Follow on public offering, Private placement, Rights issue, Bonus issue, Sweat equity issue.
Secondary Market: The securities which were earlier issued in the primary market are traded in this market.
These includes Stock exchange, Over the counter exchange.
To know more about money market click here.
An initial public offering is a public offering in which the company issues shares for the first time to raise funds.
Types of IPO:
- Fixed price IPO
- Book-built IPO
Fixed Price: In this type of IPO, a company sells it’s shares directly at a price it decides.
Book-built Offers: This presents a ‘price band’ to investors and conducts an auction to discover the final price for it’s shares.
From the above types IPOs, LIC chose the book-built offer.
Companies making book-built IPOs file a Draft Red Herring Prospectus or DRHP (so called because it has all details except the pricing of the shares), which is available on SEBI’s website until it is approved.
DRHP– It is a preliminary legal document, serves as an important communication link between the IPO-bound company and its investors and stakeholders.
Institutional investors like pension funds, insurance companies, mutual funds, foreign portfolio investors, and so forth, hold sizable portions of the shares.
Known as Qualified Institutional Bidders, these investors participate in the auction. Retail investors and non-institutional investors each receive a smaller portion of the shares sold in a book-built IPO than do QIBs.
Retail investors are individuals bidding for shares valued at up to 2 lakh Rupees per application.
Non-Institutional Investors are individuals who bids more than 2 lakh rupee per application.
In profitable companies: 50% of shares being sold are reserved for QIBs, 35%- retail investors, 15%- NII’s.
In non-profitable companies: 75 % of shares being sold are reserved for Qualified Institutional Bidders, 15%- NIIs, 10%- retail folk.
Which companies can come up with an IPO?
When a company wants to raise money from the public, SEBI has established regulations that it must follow in order to protect investors. The company must also meet a number of requirements, including having net tangible assets of at least Rs 3 crore, a net worth of Rs 1 crore for each of the three previous full years, and an average pre-tax profit of at least Rs 15 crore for at least three of the five years prior.
Who can invest in an IPO?
For an individual to become an investor, he must be an 18 years of age.
Investors of all types are eligible to participate in IPOs.
Foreign portfolio investors (FPIs), mutual funds, commercial banks, insurance companies, pension funds, and other types of investors are included in the category of investors known as qualified institutional buyers (QIBs).
Retail investors are defined as anyone who makes an investment in an issue of up to Rs 2 lakh. High net worth individuals are defined as retail investors who invest more than Rs 2 lakh.
What should you look for before investing?
While investing priority should be given to the promoter’s credibility.
Prior to investing in the IPO, investors must perform a financial analysis of the company and contrast it with competitors in the same industry.
Rather than opting for the public offering of a company that is proposing to list, an investor must give priority to a company that is already listed. Priority can also be given to a company which has solid fundamentals.
Investors are required to follow QIBs because they are thought to possess the knowledge necessary for evaluation and assessment, as well as a higher level of diligent skills.
Retail investors, who have a wider window for investing, can gauge the demand from the interest shown by the QIBs and can simply follow them. These institutional investors invest in the first few days of the issues opening. If QIBs show a lot of interest, retail investors may choose to purchase the issue.
Advantages and Disadvantages:
The advantages and disadvantages of an IPO are listed out below:
- Enhancing and expanding the equity base
- Less expensive ways to raise money
- More exposure, prestige, and enhanced public image
- Through participation in liquidity, one is able to attract and hire better employees and have the management to manage them.
- To enable acquisitions
- Making use of equity, convertible debt, and other methods to provide multiple financing options.
- The rise in marketing and accounting costs will mount as time goes on.
- It is essential to disclose private financial and commercial information.
- To ensure that an IPO goes smoothly, management must exert more effort and focus.
- In the event that the company does poorly, the chances of obtaining additional funding may be reduced.
- Information that is made public could be used against you by rival businesses or even customers.
- The ability to purchase additional shares will allow new investors to join, which could result in the initial shareholders losing their autonomy.
- Litigation risk, private securities risk, and other derivative action risks will all be present for the company.
Article Written by: Remya