One must have heard of a popular saying” No Capital No Business”. No matter how great a business model a company might have all effort comes to nought without sound working capital .Capital is the lifeblood of the Company .In order to raise capital in the primary market a business launches an initial public offer popularly called an IPO.
The first time a Company sells its stock to the public is known as an initial public offer. These are mainly launched by Companies which are new but have a very sound business model and see vast scope for expansion in their business. An Initial Public Offering could also be launched by a Company which has been in business for a while but wants to raise additional capital by selling part of its ownership to the public. The Company launches an IPO which is called “Going Public” and raises capital by selling the stake in the Company to the public.
The Company which is going public then files a draft offer document with the Securities and Exchange Board of India popularly known as SEBI. The IPO prospectus is validated to check if all information in the offer document is true and enough information is provided to the investors to make an informed decision.
The validity period of SEBI observations is only for three months .The issue needs to be opened within this three month period.
The main step involved in the launch of an IPO is the fixing of its price .The process of discovering the price of an IPO is known as book building. In the pricing process the investors themselves get to decide the optimum price of the issue which is also acceptable to the Company through a very interesting and an interactive process known as book building. The shares do not have a predetermined price but instead a price range or a price band is provided. The company fixes the price band which sets up the minimum and maximum price limit known as the floor price and the cap price. The floor price is the minimum price the investor can bid for the share and the cap price is the maximum price the investor may bid for it. The investors then offer bids for the shares. The investors state what quantity of shares and at what price they are willing to purchase these shares within the price band. The bid is then closed. The issue price or the price the securities can be sold is then decided based on the bids made. The successful bidders are allocated shares and the price at which the shares are allocated is known as the cut off price.
Qualified institutional buyers popularly known as QIB’s are mainly investors who possess good financial muscle and knowledge. They may be mutual funds, foreign institutional investors, banks or pension funds. At least 50% of the size of the issue needs to be subscribed to by the QIB’s.
Anchor investors are a part of the qualified institutional buyers (QIB) and aid the price discovery process .Before the book building process is launched the floor price and the cap price need to be determined. The QIB’s and the anchor investors help to fix these prices. If the anchor investors are bullish on the IPO then a higher cap price is fixed up to a certain maximum limit. In any field especially business big names and big reputations serve as a boost to investments .In the same way anchor investors serve as an anchor or a support to the IPO. Anchor investors having big names add to the reputation of the IPO and boost investor confidence. Retail investors perceive that if anchor investors of great knowledge and repute invest in the IPO then it must be good They serve as brand ambassadors to the IPO. According to SEBI rules and guidelines anchor investors need to stay invested for a period of at least 30 days. This protects retail investors from a sharp fall in prices due to excessive selling by the anchor investors. A minimum subscription of at least 50% is taken up by QIB and anchor investors subscribe to at least 30% of it. The anchor investors by staying invested for a minimum of 30 days and subscribing for 30% of the issue size lend stability to the IPO. Once the issue price is fixed and the price offered by the anchor investor is lower they need to pay up the difference. If the price paid by the anchor investor is higher than the issue price they lose out on the difference amount. This encourages anchor investors to do their homework or research properly before investing in the IPO.
I would like to end this article by stating that investing in an IPO involves considerable research and strategy. Most of the IPO launches are in a bullish market environment and one needs to be careful before jumping unto the IPO bandwagon. Just as all financial instruments have their advantages and disadvantages so do IPO’s .If the IPO matches ones set goals and objectives then one must march ahead and invest without fear.
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