Everyday Economics: What is an IPO?

What is the news?

The initial public offering(IPO) of Life Insurance Corp of India (LIC) is likely to run from March 10 to 14,2022.

What is an IPO?

An IPO or initial public offering is the process by which a privately held company, or a company owned by the government such as LIC, raises funds by offering shares to the public or to new investors.Following the IPO, the company is listed on the stock exchange.

How can a company file an IPO?

While coming with an IPO, the company has to file its offer document with SEBI.The offer document contains all relevant information about the company, its promoters, its projects, financial details among others.

Which companies can come out with an IPO?

In order to protect investors, Sebi has laid down rules such as: a) company must have net tangible assets of at least Rs 3 crore b) net worth of Rs 1 crore in each of the preceding three full years and c) it must have a minimum average pre-tax profit of Rs 15 crore in at least three of the immediately preceding five years.

The per-share price of the public issue is fixed by the issuer in consultation with the merchant banker. 

Who can invest in an IPO?

There are various categories of investors who can invest in an IPO:

– Qualified institutional buyers (QIBs) is a category of investors that includes foreign portfolio investors (FPIs), mutual funds, commercial banks, insurance companies, pension funds, etc.

– All individuals who invest up to Rs 2 lakh in an issue are classified as retail investors. 

– Retail investors investing above Rs 2 lakh are classified as high net worth individuals.

Note: You have to be 18 years of age to become an investor. A brokerage account is needed to invest, and you have to be at least 18 years old to have one.

Where do the proceeds of the IPO go?

If the issue raises fresh capital, the proceeds of the IPO go to the company, and can be utilized for future growth, expansion, debt reduction, etc. 

If the issue involves an offer for sale by promoters or existing investors, then the money goes to them and not to the company. 

What are the advantages of listing a company?

Listing on the stock exchange calls for additional disclosures by companies on a regular basis, leading thereby to more stringent compliance requirements. But it may also help a company raise capital, and diversify and broaden its shareholder base.

Source: This post is based on the article “Everyday Economics: What is an IPO?” published in Indian Express on 16th Feb 2022.