A company needs funds for many reasons like repaying debts, expansion, upgrading etc. it can raise funds by taking a loan or selling securities in the market. An IPO is the first time a company goes public and sells its shares. IPOs in India are a major way of investment in the stock market. Two major types of issues take place in IPOs: Book Building and Fixed Price Issues.
What is a Book Building Issue?
When a firm does an IPO and provides equity shares with a price range, this is referred to as a book-building issue. When a corporation puts a price range, it invites bidders to submit bids within the price range they provide. In simple words, a company offers its shares with a price range to evaluate the final price of the shares. After looking at the response of bidders, the company can decide its issue price or cut-off price.
The Process and Timeline
1. Hiring the Lead Manager and Merchant Banker
The first and foremost step to an issue is hiring a bank for all the official formalities. The lead manager makes the prospectus, submits it to the board, and approves it. This prospectus is then available for the public to read before investing in the company.
2. Bidding Process
The bidding process is where the bidders place their bids in between the price range given by the company. It continues for seven days.
3. Basis of Allotment
Next, the company analyses the performance of the IPO and allots the shares to the bidders. Lead managers play an important role here too. This process is completed within two weeks of the closure of the issue. Share allocation is done during the same time. This also happens within 15 days from the date of closure.
4. Listing of the Shares
The final process is the listing of the shares in the stock market. SEBI analyses the share demand and the company’s future and then decides on a listing price. This listing price has nothing to do with the company. Here, the role of the company finishes. The listing is done within a week from the finalisation of the issue, i.e., once the shares reach the Demat accounts of all the shareholders, the listing process begins.
Before investing in any company, reading its prospectus becomes very important. So, make sure you dwell deeply into analysing a company’s risk factors before investing in its IPO.
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