How Do IPOs Work?

How Do IPOs Work?

The December IPO season has already started with the Burger King IPO being a blockbuster with 157x subscription. Retail investors have been pumping in money in almost every IPO since July. So far there have been 3 IPOs this year with subscription of over 150 times, Burger King, Mazagon Dock Shipbuilders, and Happiest Minds. So, what is the procedure followed by these companies? How do they get listed? Let’s get clear with the basics.

Crux of the Matter

What Is IPO?
An IPO is the selling of securities to the public in the primary market. Book Building is the most common process followed – it aides in price and demand discovery. In this mechanism, when the book is open, bids are collected from investors at various prices within a price band. The issue price is determined based on the demand generated in the process.

Process Of IPO
1. Merchant Bankers with regional and national reach are hired. Among them, one is chosen as the Book Running Lead Manager (BRLM).

2. Red Herring Prospectus is submitted to the exchanges, SEBI & ROC. It contains information on the company’s past performance, future plans, etc.

3. Company (issuer) specifies the number of securities to be issued and the fixed-price or price band. The price band must have a maximum spread of 20%. For instance, if the floor price (lower limit) is ₹10, then the ceiling price (upper limit) of the price band must not be more than ₹12.

4. Syndicate members with whom orders are to be placed are appointed. The syndicate members input the orders into an ‘electronic book’. This process is called ‘bidding’ and is like an open auction. The bidding window normally remains open for 3 days. Bids must be entered within the specified price band.

5. Different categories as defined by SEBI: Retail Investors, Non-Institutional Investors, & QIB have their own Quotas.

6. At the close of the book-building period, the book runners evaluate the bids based on the demand at various price levels.

7. The final price is decided by the issuer post the closing of the bid. Allocation of securities is made to the successful bidders, the rest get refund orders by the Registrar & Transfer Agents.

Payment Method
The payment method is ASBA, i.e., Application Supported by Blocked Amount. It simply means that an applicant authorizes its bank to block the required funds in her savings or current account.

Example
If one fills the Burger King IPO at a price of ₹60 and a fixed lot of 250 shares, the total blocked amount in your bank account is ₹15000. If one is allotted the shares, the money will be deducted from the bank account, whereas it will be unfreezed if the investor does not receive the allotment.

Face Value Of Equity Share
Subject to provisions of Companies Act/ SEBI Act/ regulations, an issuer (other than a government company/ statutory authority/ corporation/ any SPV set by them engaged infrastructure sector) making an IPO may determine the face value of shares in this manner:

1) Face Value ≥ ₹ 500 – If the issue price is ₹500 and more, then the face value of shares must be between ₹10 and ₹1 per share.
2) Face Value <₹ 500 – If the issue price is below ₹500, then the face value must be ₹10 per share.

Read More: Why Is Ant Group IPO Making A Buzz?

Summachar brings you this story in collaboration with Finmedium that can be found on Instagram at @finmedium and on the web here.

Curiopedia
  • Bootstrapping in business means starting a business without external help or working capital. This financing approach allows owners to maintain control of their business and forces them to spend with discipline. In addition, bootstrapping allows startups to focus on customers rather than investors, thereby increasing the likelihood of creating a profitable business.
  • Book building is a systematic process of generating, capturing, and recording investor demand for shares. Usually, the issuer appoints a major investment bank to act as a major securities underwriter or bookrunner.
  • The Whopper is the signature sandwich and an associated product line sold by international fast food restaurant chain Burger King. The hamburger is well known in the fast-food industry, with Burger King billing itself as “the Home of the Whopper” in its advertising, signage, and in its concept store, the BK Whopper Bar.

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