What is IPO? IPO Special #AskRachanaShow Ep7 By CA Rachana Ranade

Summary

In this Q&A episode, the host addresses common queries about Initial Public Offerings (IPOs), explaining the concept of IPOs, their purposes such as business expansion or debt repayment, and the difference between IPOs and FPOs. The video also covers how to track IPO subscriptions, the implications of promoters using IPO funds to pay off debts, and the significance of promoter selling stakes. Additionally, it discusses the possibility of selling allotted stocks on the listing day, the Chennai category for high net worth individuals, and compares IPOs to secondary market shares. The host touches on book building issues versus fixed price issues and hints at upcoming IPOs, encouraging viewers to stay informed and engaged.

Takeaways

• 📈 **IPO Definition**: An IPO (Initial Public Offering) is when a company offers shares to the public for the first time to raise additional funds for various purposes like business expansion or debt repayment.
• 💼 **Purpose of IPO**: Companies go public to raise funds for different reasons such as expanding the business, increasing working capital for daily operations, or repaying debts.
• 📊 **IPO Subscription Tracking**: The website Chittorgarh.com is mentioned as a resource to track IPO subscription levels and oversubscription data daily.
• 💵 **Debt Repayment with IPO Funds**: Using IPO funds to repay debts is not inherently bad and can improve a company's profitability if the operating profit is good but overshadowed by high-interest payments.
• 🔄 **Promoter Selling Stake**: Promoters may sell their stake during an IPO for various reasons, including regulatory norms that limit their shareholding percentage or to diversify the investor base.
• 🚫 **No Lock-in Period**: There is generally no restriction on selling IPO shares on the listing day, unlike anchor investors who are subject to a lock-in period as per SEBI guidelines.
• 🌐 **IPO vs. Shares**: Investing in an IPO can offer quick returns if the market price is higher than the issue price, whereas buying shares in the secondary market might offer more stability but less immediate gain potential.
• 📚 **Book Building Issue**: Book building is a process where merchant bankers determine a price band based on investor interest and willingness to pay, allowing the market to set the final issue price.
• 📉 **Fixed Price Issue**: In contrast to book building, a fixed price issue is when the company sets a single price for the shares offered in the IPO.
• 🌟 **Investment Strategy**: The decision to invest in an IPO or buy shares in the secondary market should be based on individual financial goals, risk tolerance, and market conditions.

Q & A

What does IPO stand for and why would a company go public?

IPO stands for Initial Public Offer. A company goes public to raise additional funds for various purposes such as business expansion, working capital for day-to-day operations, or to repay existing loans.

How can we track the subscription status of an IPO on its last day?

You can track the subscription status of an IPO on its last day by visiting websites like Chittorgarh.com, which provides daily updates on the subscription levels of different IPOs.

Is it true that promoters sometimes use IPO funds to pay off bad debts? If so, is this a risk factor?

Yes, promoters may use IPO funds to pay off debts, which is not inherently bad. If a company has a good operating profit but is burdened with high-interest loans, using IPO funds to reduce debt can improve profitability and may not be a risk factor.

What does it mean when promoters sell their stake during an IPO, and is it a risk factor for investors?

Promoters selling their stake during an IPO is not necessarily a risk factor. It could be due to regulatory norms or to allow a broader investor base to participate in the company's growth. It's important to consider other parameters when evaluating such a situation.

Can investors sell the allotted shares on the listing day of an IPO, or is there a lock-in period?

There is no lock-in period for investors to sell their shares on the listing day. However, anchor investors are subject to lock-in periods as per regulatory guidelines, which can range from 1 to 3 years.

What is the difference between an IPO and investing in shares in the secondary market?

An IPO is the first-time opportunity to invest in a company's shares, potentially offering quick returns if listed at a good price. Secondary market investments do not have the same initial price advantage but can offer more stability and liquidity.

What is a book building issue in the context of IPOs?

A book building issue is a process where merchant bankers or consultants determine a price band for the IPO based on investor interest and demand. It allows investors to indicate the price they are willing to pay, influencing the final IPO pricing.

What is a fixed price issue and how does it differ from a book building issue?

A fixed price issue is when the company sets a specific price for the shares being offered in the IPO, without seeking investor feedback on pricing. This is in contrast to a book building issue, where the price is determined based on investor interest.

What is the Chennai category in an IPO, and does it increase the probability of allotment?

The Chennai category, also known as the high net worth individual (HNI) category, is for investors willing to invest more than 2 lakh rupees in an IPO. It does not necessarily increase the probability of allotment, as the demand in this category can be high, similar to retail.

When is the HDB IPO expected to come, and where can we get updates on it?

The HDB IPO was expected in 2020, but the exact date was not announced at the time of the video. For updates, one can follow financial news, the company's announcements, or subscribe to financial market updates.