How an Initial Public Offering (IPO) Works
An Initial Public Offering (IPO) is the process by which a privately-held company becomes publicly traded by issuing shares of stock to the public and listing its shares on a stock exchange. Here's how it works:
• Preparation: The company hires investment banks to underwrite the offering and files a registration statement with the SEC disclosing its financials and business operations.
• Roadshow: The company's management and underwriters go on a "roadshow" to meet with potential investors and promote the offering.
• Pricing and Allocation: The underwriters determine the price of the stock and allocate shares to institutional and retail investors.
• Trading: The shares are listed on a stock exchange and begin trading. Investors can buy and sell the stock on the exchange just like any other publicly-traded stock.
• Proceeds: The company receives the proceeds from the sale of the stock, which can be used for growth, paying down debt, or other purposes.
Who sets the IPO price?
The IPO price is typically set by the investment bank or banks (also known as underwriters) handling the offering in consultation with the company. The underwriters consider various factors such as market conditions, demand for the stock, and the company's financial performance, among others when determining the IPO price. The underwriters will also conduct a roadshow to gauge investor interest and demand for the stock, which can also influence the final IPO price. Ultimately, the goal is to set a price that will maximize the demand for the stock and ensure a successful first day of trading for the company.
Eligibility Required to Invest in an IPO
To invest in an Initial Public Offering (IPO) in India, the following eligibility norms must be met:
• Age: The investor must be at least 18 years old.
• Residency: The investor must be a resident of India and have a valid Permanent Account Number (PAN).
• Demat Account: The investor must have a demat account, which is an electronic form of holding securities.
• Bank Account: The investor must have a linked bank account to facilitate the payment for shares.
• KYC: The investor must have completed the Know Your Customer (KYC) process with a registered intermediary such as a stockbroker or a depository participant.
Read Also - How to Apply for an IPO
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