Initial Public Offer
Initial public offer (IPO) as the name suggests refers to when a company goes public or issue shares of the company to the public in order to raise capital for the first time. After the IPO, the company gets listed and its shares are traded on stock exchange. Once it gets listed then the permission to trade these shares is granted by shareholders i.e. to whom the shares have been allotted in the IPO. There can be many reasons for bringing out an IPO. First, when the company issues new shares to the public, then the money raised from public goes to the company. Second, when the Govt. Sell their stake in the company to the public, then the money raised goes to the Govt. (like the disinvestment of PSUs). However, one must be wondering why would individuals invest in a particular company? The answer is dividends. The shareholders expect the company will distribute the share of future profits among them as dividends.
How an IPO is conducted IPOs generally involve book runners i.e. one or more investment banks known as underwriters. The underwriters retain a portion of the proceeds as their fee. This fee is called an underwriting spread. Various methods of conducting an IPO are Dutch auction, Firm Commitment, Best Efforts, Bought Deal and Self Distribution of stock. IPOs can be made through the Fixed Price Method or Book Building Method. In the fixed price method, the price at which the securities are offered is fixed in advance. In the book building method, the investors have to bid for shares within a price band specified by the issuer and the final price is decided after observing the result of the bidding. The fixing of the band and the bidding process are done with the help of an investment bank or a group of several companies specializing in securities. While most of the companies are eligible to make a public issue are free to decide the price band but infrastructure companies are subject to follow SEBI norms as well as banks are...
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