Role of IPOs in changing capital markets in India

What is an IPO?

An initial public offering or IPO is an approach of private companies to put forward their shares to a large amount of public in a new stock issuance. In simple words, it is a procedure of sharing or proposing shares of a private company to public investors for buying shares and investing in Big private companies.

When a private company goes for IPO it allows its investors to buy companies shares which increases companies’ capital. An investor is provided all the details of a private company by the particular mode from where an investor is ready to invest in IPOs. The investor has to faultlessly go through all the details of the private company and accurately analyze company or organization background, offer detail, company valuation, capital structure, financial performance, strength, risks & benefits of investment, returns, peer comparison, and recommendation about IPO.

Two different types of IPOs

The first category of IPO is fixed price offer in this category company decides a fixed amount of its shares for selling stocks for investors.

The second category is book building offering in this category company issues a price band, lowest share price or floor price, and highest share price or cap price. Investors can also make an offer between the price band.

How to invest in an IPO?

Investors have to firstly decide in which IPO they want to invest or buy shares, investors can buy as many shares they want from as many companies. Secondly positioning or arranging of funds for IPO. Thirdly getting a Demat account, many websites or apps provide you to open Demat accounts easily. An investor has to link its pan card, aadhar card, bank account details, to the app, and within 1-2 days account is ready for investments.

Apps like Groww, upstox, OctaFX, etc, help investors for easy online buying and selling of shares. it is government verified, secured plus 0 paperwork.

fourthly applying for an IPO on different platforms or a favorable one. And lastly biding process and allotment of shares. in the bidding process, there is a ‘ lot size’ specified by every private company, lot size means a minimum number of shares that are offered during IPO for investing. and lastly, after an organization launches an IPO to the general public, all bids for the shares are registered online. Then through an online process, all invalid bids that were incorrectly submitted are eliminated from the total number of bids. With this, you now have the final number of successful bids for the said IPO.

There are two cases amongst which the situation of a company may fall in, that are first the total number of successful bids is less than or equal to the number of shares offered by the firm And second The total number of successful bids is more than the number of shares offered by the firm

Case 1: Total number of bids is less than or equal to the number of shares offered

If the total number of bids made by the applicants is less than or equal to the number of shares being offered, then complete allotment of stocks will take place. Thus, every applicant who has applied will be assigned shares.

Case 2: Total number of bids is more than the number of shares offered

If the total number of bids made by the applicants is more than the number of shares being offered, then the allotment process of shares requires more planning. SEBI or Securities and Exchange Board of India mandates that at least one lot should be allotted to every individual who has applied

Advantages and Disadvantages of investing in an IPO

In an IPO, if the price of shares reaches high then the investor can easily sell their shares at higher prices accounting for to profit of investors but if the prices fall then investors have to face loss and sell the shares which reduce the profit and amount invested. Prices of shares completely depend on fluctuations of the capital market.

Role of IPOs in changing capital markets

Large scale promotion of the company and its products which increases brand name, brand value, recognition in national and international markets, large scale of the public gets aware about shares.
IPO provides great and unique opportunities to new and small investors.
Every company requires money for an increase in operations, as well as the creation of new products so it can pay off existing debts. To gain this much-needed capital for a company, a company must go public.
An objective of an IPO for a company is to raise its share value in the capital market and for the public is to provide them profitable shares to increase their financial investment.
IPO helps in growing or developing of company.
It is a faster method for investors to enlarge their money.
oftentimes the IPO is the only way for the company to get enough cash so it can fund a massive expansion.
The funds allow the company to invest in new and latest infrastructure and capital equipment.
An IPO can also help the company in paying off its existing debt.
When the company is thinking of acquiring another business, it can offer its shares as a form of payment. If the IPO allows the company to attract the top talent, it’s because it can offer stock options. This will enable the company to pay its executives a fairly low wage upfront. In return, the initial public offering promises investors that they will be able to cash out through it at some point in the future
The number of initial public offerings that are issued is typically a sign of the economy’s and the stock market’s health. During a financial recession, initial public offerings tend to drop as they are not worth the hassle, especially when share prices are depressed. When the number of IPOs grows, it is a sign that the economy is churning again and getting back on its feet.
Promotes Investment: Various financial assets like IPOs, shares, securities, bonds, etc. motivate savers to lend to the government or invest in the public company.
Encourages Economic Growth: The capital market not only reflects the general condition of the economy but also smoothens and accelerates the process of economic growth

Conclusion

If shares, debts are not managed efficiently, rapid growth and development in capital markets can make the market more open to scams, volatility, excessive speculation, and misuse by select parties. Capital markets ride on the savings of small and often uninformed retail investors, directly or indirectly. For policymakers, the challenge, therefore, is to attain a balance between the pace of growth and conservatism ensuring transparency and sound growth. Initial public offering or IPO help in the evolution of sustainable capital markets. it promotes more public investors for investments in shares, IPO stocks. Through an Initial Public Offering or IPO, a company raises capital by issuing shares of stock, or equity in a public market.

Author – Simran Singh Chandel, Student at New Law College Bharati Vidyapeeth University Pune