Initial Public Offering

What IPO IS?Initial public offering (IPO), is referred when a

company issues common stock or shares to the public for the first time.

They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.

IPO is New shares Offered to the public in the Primary Market .The first time the company is traded on the stock exchange.

Major IPO’s In INDIAMajor IPOs in India are:Reliance Power IPO Wockhardt Hospital IPO KNR Constructions Ltd. IPO Manjushree Extrusions Ltd IPO J Kumar Infraprojects Ltd. IPO Future Capital Holding Ltd IPO Cords Cable IPO

Reason for listing in IPOThe increase in the capital: An IPO allows a

company to raise funds for utilizing in various corporate operational purposes like acquisitions, mergers, working capital, research and development, expanding plant and equipment and marketing.

Liquidity: The shares once traded have an assigned market value and can be resold. This is extremely helpful as the company provides the employees with stock incentive packages and the investors are provided with the option of trading their shares for a price.

Cont……………Valuation: The public trading of the shares

determines a value for the company and sets a standard. This works in favor of the company as it is helpful in case the company is looking for acquisition or merger. It also provides the share holders of the company with the present value of the shares.

Increased wealth: The founders of the companies have an affinity towards IPO as it can increase the wealth of the company, without dividing the authority as in case of partnership.

Procedure for IPOIPOs generally involve one or more investment banks

as "underwriters." The company offering its shares, called the "issuer," enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.

The sale (that is, the allocation and pricing) of shares in an IPO may take several forms. Common methods include:

Bought deal Dutch auction Firm commitment Self Distribution of Stock

Pricing IPOInvestment banks, take many factors into

consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise an adequate amount of capital for the company. The process of determining an optimal price usually involves the underwriters ("syndicate") arranging share purchase commitments from leading institutional investors.

Issue PriceA company that is planning an IPO appoints lead

managers to help it decide on an appropriate price at which the shares should be issued. There are two ways in which the price of an IPO can be determined: either the company, with the help of its lead managers, fixes a price or the price is arrived at through the process of book building.

Note: Not all IPOs are eligible for delivery settlement through the DTC system, which would then either require the physical delivery of the stock certificates to the clearing agent bank's custodian, or a delivery versus payment ("DVP") arrangement with the selling group brokerage firm. This information is not sufficient.

How public can apply in IPO?When a company floats a public issue or IPO, it

prints forms for application to be filled by the investors.

. Public issues are open for a few days only. As per law, any public issue should be kept open for a minimum of 3days and a maximum of 21 days.

The duly complete application from, accompanied by cash, cheque, DD or stock invest should be deposited before the closing date as per the instruction on the from. IPO's by investment companies (closed end funds) usually contain underwriting fees which represent a load to buyers.

Factors that require to keep in mind before deciding to apply to an IPO?

Track record of the promotersFinancials position of that companyRead Prospectus very carefullyIssue price

Is IPO Risky for PublicIPOs can be a risky investment. For the

individual investor, it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

Drawbacks of IPOIt is true that IPO raises huge capital for

the issuing company. But, in order to launch an IPO, it is also necessary to make certain investments.

Setting up an IPO does not always lead to an improvement in the economic performance of the company. A continuing expenditure has to be incurred after the setting up of an IPO by the parent company.

Cont….A lot of expenses have to be incurred in

the form of legal fees, printing costs and accounting fees, which are connected to the registering of an IPO.

the rules and regulations involved to set up public offerings and this entire process on the other hand involve a number of complexities which sometime require the services of experts in relevant fields.

ConclusionIPO is used by a company to raise it’s

funds. The extra amount obtained from public may be invested in the development o f the company, although it costs a little to a company but it gives a way to get more money for long term investments.