IPO Full Form, Process & Types

Initial Public Offering (IPO) is a process where a company raises funds from the market. When investors apply for and receive IPO shares, they become part owners or shareholders of the company.

What is the Full Form of IPO?

The Full Form of IPO is Initial Public Offering. As the name implies, IPO is a process by which a privately held company sells its shares to the public for the first time. The IPO process turns a privately held company into a publicly traded company and allows it to raise capital for business growth. 

When investors invest their funds in an IPO, they get to purchase shares at a ‘potentially’ lower price before they get listed on the stock exchange. This offers opportunities for early gains. 

However, investors must know that there is no guarantee of profit as the stock price can fluctuate after the IPO and may not always rise. 

How Does the IPO Process Work?

The IPO process begins when a company decides that it wants to sell its shares to the public via a stock exchange, such as Bombay Stock Exchange or National Stock Exchange. 

The company has to get approval from the Securities and Exchange Board of India (SEBI). For this, it needs to file an application along with Draft Red Herring Prospectus (DHRP). 

After getting SEBI’s approval, the company has to file an application with the stock exchange, and then register the prospectus with the Registrar of Companies (ROC). 

Next, the company has to conduct roadshows to advertise the IPO to potential investors. After this, the IPO price is determined with the help of underwriters. After the IPO price is set, the investors subscribe to shares accordingly. 

Finally, the company lists the shares on the exchange for trading. This process allows the company to raise capital from the public market while becoming publicly traded.

Types of IPOs 

Based on the method of pricing, IPOs are primarily categorized as Fixed Price Offerings and Book Building Offerings. They are explained below:

Fixed Price Offering

A Fixed Price Offering, a.k.a Fixed Price IPO, is a type of Initial Public Offering where the company and its underwriters evaluate the company's assets, liabilities, and overall financial standing.

Based on this assessment, they determine a fixed price per issue to achieve the target funds. This predetermined price is then printed in the order document, which justifies the price using both qualitative and quantitative factors. 

Investors can assess the demand for securities only after the issue closes. In fixed-price offerings, oversubscription levels can reach several hundred times.

Book Building Offering

A Book Building Offering, a.k.a Book Building IPO, is a type of Initial Public Offering where investor demand during the IPO process determines the final share price. Investors submit bids within a specified price range, rather than following a fixed price. The lowest price in the band is the ‘floor price,’ while the highest is the ‘cap price.’

The order document reflects the pricing band. Investors can bid for the number of shares they want at their preferred price. Companies offer securities at or above the floor price. As the book builds, the demand becomes known daily.

Conclusion

An Initial Public Offering (IPO) is a process that enables a company to become publicly traded by offering its shares to the public investors for the first time. IPO process helps a company to raise capital and provides investors an opportunity to own shares of a company and become its part-owners. 

It is important to remember that investment in IPOs carries risks since stock prices may fluctuate after listing on a stock exchange.

For IPO consulting services, connect with IPO consultants at Registrationwala.