IPO- Initial Public Offering under Securities and Exchange Board Regulations.
IPO is a process by which any young or old company decides to be listed on exchange and go public by sale of its stock to general public. Companies with the help of IPO by issuing new shares to public can raise equity, even the existing shareholders can sell their shares to public without raising fresh capital. On the similar lines the company that offers the share is not obligated or bounded to repay the capital to public investors.
The company here, which offers the share to public is known as ” Issuer” with help of investment banks, the shares of company are sold in an open market and further sold by investors through secondary market trading. Once the company is listed in exchange the shares can be traded freely.
There are two types of IPO which are commonly known-
1. Fixed Price Offering
This is referred to as issue price set by some companies fro initial sale.
2. Book Building Offering
In this case company that initiates IPO offer at 20% price band on stocks to public investors, the interested investors then bid on the shares before the final price is set or finalized.
IPO is mostly used by Micro, Small & Medium Enterprises, Start-ups and companies that plan on either expanding or willing to improve their business that is either existing or is going under loss.
This process helps the companies to acquire fresh capital and focus on finance research.
It is said that IPO brings more transparency into the affairs of company as they are also required to inform Financial numbers and required details to the stock exchange and after the listing various bonds and equity comes under the scrutiny.
Why invest in an Initial Public Offering?
Public investors who bet on IPO of an issuer can earn good returns if they have a strong expertise in the field and are wise enough. For this one who invests must be able to clearly analyse the prospects in future of the related company and history of the company weighing the growth and development it has led to.
Role of Securities and Exchange Board?
Security And Exchange Board Of India- established in 1988 and comes under administrative control of Ministry Of Finance, which was later given a statutory status in 1992 through an ordinance. The participation of public did increase after that but also led to emergence of issues with the expansion of investors leading to several malpractices on part of companies, brokers, merchant bankers, investment consultants. Most of them are are self styled merchant bankers,
the practice of Rigging Prices, unofficial premium on new issues, non-adherence of companies provision act, violation of rules and regulation of stock exchange has been observed.
Such activities of unfair trading breaks the investor confidence and multiplies the investor grievances in view of which SEBI was decided to set up as separate body.
Aim of Securities and Exchange Board as a regulator body is to focus on three groups-
1. The Issuer’s- providing them a place to raise funds confidently and transparently
2. The Investor’s – protecting their rights and interest with delivering authentic information.
3. The Intermediaries – offering them competitive , professionalized market with an efficient infrastructure, so as to be able to render better service to above mentioned groups.
We shall now look at the guidelines that were revised in recent past for the issuer’s and investor’s-
For companies raising funds through IPO:
Initially the companies were not to specify the amount of funds raised for routine investments or acquisitions. Where in now the if investment target is not identified by company, amount the general corporate purpose cannot exceed 35% of total fund raised. On the other hand in terms of acquisition target the amount must not increase 25% of total fund raised. This provision with a set limit is to make sure companies are clear about the usage or spending the funds in judicious manner further strengthening the scrutiny.
For the Investors earlier there was a lock-in period from the allotment date, with the revised rule these investors can sell half of their shares within the lock-in period remaining shares only after 90 days of allotment. With the revised guideline the non institutional investors would not be often hurt like before since the issuer’s were only interested in allotting shares to big name investors to get a good response from retail investors. Many investors with good name in market would play along since it’s easier for them to sell the shares within 30 days . Now the genuine investor sentiments wont get hurt and less wise investor would reconsider investing into an IPO.
For Non-Institutional investors 35% of IPO was earmarked but now one third portion available to Non-Institutional investors will be reserved with an application size of more than Rs 2 Lakh and upto 10 Lakh rupees. This does not create a level playing field but the High Net Worth Individual would enjoy the right since their ability to borrow heavily keeping in mind that earlier these HNIs were at disadvantage as they used own funds for bidding.
Price band for book built IPOs which exists fro a reason, ensuring accurate price discovery, earlier companies were allowed to set a price band as per their choice but now an upper limit keeping in mind the lower limit has been set to 105% (of the lower limit).
This was being followed on papers but not in accordance to the laws or the least in the spirit of the law. This would make a slight difference by being forced to price their issues realistically.
Previously in “Offer For Sale” there was no limits set on sales of shares by the existing shareholders but again this has been bought to a limit where-
Shareholders who owns more than 20% of pre-issue wont be able to offer more than 50% percent in an IPO. Those holding less than 20% won’t be able to sell 10% of their shares. This counters the companies trying to exit the existing shareholdings. This debacles the secondary market would make it not very easy or difficult to sell the remaining stake. This benefits the new investors who would directly be investing into IPO of any company.
Considering the given issues there are more changes that came up one of which is also rating agencies monitoring IPO proceeds till 100% of it spent many countries misuse the funds through IPO. It adds more compliance but is said to have limited impact.
This Friday Securities and Exchange Board proposed that the loss- making technology companies must while making their listing should make disclosure about their key performance indicators. This move has comes as many new age technology companies do not have a track record of their profits and trying to list and raise funds through IPO.
Disclosures in the ‘Basis of Issue Price’ section must be supplemented with non-traditional parameters such as key performance indicators and disclosure of certain additional parameters such as valuation based on past transactions/fund raising by the issuer company, particularly for a loss-making company.
With a lot of companies which are now going under loss and are listed in IPOs. Securities and Exchange Board regulations are being under scanner by the public investors, only new stricter regulation can help IPO from becoming a ponzi scheme.
A close scrutinization of companies offering listing is required. The statutory body is trying to come up with more transparency so as the investors don’t lose their investment, by buying share of companies which may fall at any time. Public investors put faith into SEBI and their ability to be able to protect the rights of the public investors.