What is an IPO?
In financial terms, IPO or
initial public offering is the first issuance of a company's shares to the
general public. It is called as primary market. These shares are allowed to be
transacted in the stock market where they can be bought and sold. It is called
secondary market. In other words, An IPO is defined as an exercise when an
unlisted company makes either a fresh issue of securities or an offer for sale
of its existing securities or both for the first time to the public. One thing
to note is the shares allocated to the public do not constitute 100% of the
company's shares. Only a certain percentage is allocated to the public. Usually
the company owner or the board of directors will still hold the majority of the
shares.
What is the need of
IPO?
Organization offer IPO is to
raise capital for their organization. The main reason is because companies plan
to use the money gathered from IPO to further expand their business or to
increase their business operations. Legal compliance and financial regulations that
needs to be followed during IPO process.
Procedure for issue of IPO
Step :1(Assigning
Underwriter)
Company needs to set up underwriters. Underwriters are nothing but investment
banks. The purpose of underwriters is to assess the business. Underwriters are
used to analyze operational and financial background of the company in order to
determine the value of the company's shares to be sold to the public. The
company will sign an agreement with the lead underwriter to sell shares on the
market and the underwriters can proceed to sell these shares to any interested
investors. For large corporations dealing with billions of dollars of shares,
several large investment banks may act as underwriters. These banks are paid
commissions for shares that they sell. The underwriters will also help the
company deal with the legal and financial regulations imposed by the country.
Step :2 (Performing Legal procedures)
While launching IPO, they reserve some percentage shares for various categories
such as Retail investors, Institutional Investors and Employees. As soon as the
IPO is successfully launched, companies will need to submit their annual
business earnings reports to the financial securities board since the company's
shares will be listed in the stock market. It changes based on the country. In
India, it is SEBI.
Step : 3(Grading)
IPO-grading is nothing but Grade which assigned by a Credit Rating Agency
registered with Financial securities. Shortly, it is called as CRISIL . The
grade represents a relative assessment of the fundamentals of that issue in
relation to the other listed equity securities in India. These grading is
generally assigned on a five-point benchmark
grade 1 : Poor fundamentals
grade 2 : Below-average fundamentals
grade 3 : Average fundamentals
grade 4 : Above-average fundamentals
grade 5 : Strong fundamentals
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