IPO – Secondary market listing

Once the IPO process is over the exchanges give the listing date of the security on secondary market. The company has to satisfy the rules to get listed on a particular exchange. The most important rule is minimum paid up equity capital that a company has to have. Paid up capital represents the number of shares for which the investors have paid as per the issue price fixed. If there are no installments in an issue Paid-up capital is generally equal to subscribed capital.

Listing day price of the share gives an idea of future of the stock. If the issue is oversubscribed in the IPO then there fairly more chances of premium to the IPO price in the secondary market. This is because the over subscription indicates that there are more buyers. Usually institutional investors don’t get the sufficient quantity of shares in IPO and try acquiring them in secondary market (mostly of the times retail investors are the net sellers on listing day). Read more

December 27, 2008 | Filed Under Stocks | Leave a Comment

IPO – Allotment of Shares

An IPO(Initial Public Offer) has an issue start date and issue end date, during which the investors can apply for the stocks. The applications forms are made available online and (or) offline with brokerage houses and offline with some agents and outlets.

Allotment of shares to the applicants depends on whether the issue is oversubscribed or undersubscribed. If the issue is undersubscribed all the applicants will get the full quantity of shares they applied for. The unsubscribed shares will have to be bought by the underwriter if the agreement is structured based on ‘firm commitment basis’.

If it is oversubscribed then the management and the investment banker decide a way to allot shares. They could randomly allot shares or proportionately allot them. If one has applied for 10 lots and the issue is oversubscribed by 5 times then on proportionate basis the applicant will get 2 lots. They can decide any other method of allotment of shares. Read more

December 27, 2008 | Filed Under Stocks | Comments Off

IPO – Methods of Pricing

Once the registration gets approved by the regulator and the completion of meetings with potential investors the company and investment bank together decide on issue date, issue price and the minimum lot quantity that an investor should subscribe to. The maximum quantity (amount) that an investor can subscribe to depends on the category (eg; retail investor, Mutual Fund etc) that the investor falls into. This limit and categorization are provided by the regulator. However the exact price is decided by one of the following methods.

Fixed Price Method
Book Building method

Fixed Price Method: In this method of pricing the investment bank in consultation with the firm fixes the price at which an investor can subscribe to. This price could be at par value or at a premium above the par value. Read more

December 21, 2008 | Filed Under Stocks | Leave a Comment

IPO – Filing Documents and Red Herring Prospectus

The investment bank prepares a registration statement to be filed with the regulator (SEC in US and SEBI in India). This registration document contains the management related information, the current promoters’ holdings structure, financial statements of the firm, legal issues related information, if any and the purpose of IPO.

This document must be signed off for further proceedings. The regulator takes some time, which is called as ‘cooling off period’, to verify accuracy of the information provided in the registration document. Since the company will become public limited (from privately held) and the regulator has to look after the interests of investors, there are strict rules in place to get the required approval. Read more

December 21, 2008 | Filed Under Stocks | Leave a Comment

IPO – Agreement with Investment bank

A company first informs the underwriter how much capital it wants to raise through IPO. Then the merchant bank analyzes the market conditions and the goodwill the company has in the market and lets the firm know if they can raise that much amount. Once the capital to be raised is frozen fee structure to be paid to the investment bank (merchant bank) is finalized.

There are two types of structures as far as the underwriting is concerned.

Firm Commitment basis
Best efforts basis

Firm Commitment basis: In this type of agreement the investment bank agrees to underwrite the issue i.e. it buys the shares from the firm and sells them in IPO. If some part of the issue is not subscribed then it will have to take the responsibility and hold the shares. However it can sell them off in secondary market in favorable conditions, if they want. In this process, the merchant banker acts as a dealer and the spread (difference between the price it offers to public and the price at which it buys from the firm) is the profit. Read more

December 21, 2008 | Filed Under Stocks | Leave a Comment

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