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.

Outlines

00:00

📈 Understanding IPOs and Their Significance

The video script begins with an introduction to an episode dedicated to IPOs, explaining the surge in their numbers and the curiosity it has sparked among viewers. The host, Alison, addresses the first question by Sangeeta Agarwal on the meaning of an IPO. IPO stands for Initial Public Offer, which is a process where company promoters offer shares to the public for the first time to raise additional funds for various purposes such as business expansion, working capital, or debt repayment. The script also differentiates between IPOs and FPOs (Further Public Offers), and guides viewers on how to track IPO subscriptions on websites like Chittorgarh.com. The discussion touches on the reasons behind high subscription rates and the potential risks associated with promoters using IPO funds to pay off debts.

05:00

💼 IPO Strategies and Investor Considerations

In the second paragraph, the script delves into the reasons why promoters might sell their stakes during an IPO, emphasizing that it's not necessarily a negative sign. It explains the concept of 'offer for sale' versus 'fresh issue' and the regulatory norms that limit promoter shareholding to encourage broader ownership. The video also addresses the query about selling IPO stocks on the listing day, clarifying that there's no lock-in period for regular investors, unlike anchor investors who face restrictions. The segment highlights the difference between investing in IPOs and secondary market shares, suggesting that IPOs can offer quick returns but also carry risks if the listing price is lower than the issue price.

10:03

🏦 IPO Types and Upcoming IPOs

The final paragraph discusses different types of IPO issues, focusing on book building issues where merchant bankers determine a price band based on investor feedback. It contrasts this with fixed price issues where the company sets a single price for the shares. The script also touches on the upcoming HDB IPO, expected in 2020, and the concept of the Chennai category for high net worth individuals. The host encourages viewers to explore more about IPOs through her website and other educational resources, emphasizing the importance of continuous learning in the stock market. The video concludes with a motivational note, urging viewers to enhance their financial knowledge in the new year.

Keywords

💡IPO

An Initial Public Offering (IPO) is the first sale of stock by a company to the public. It is a significant event where a private company transforms into a public one, allowing it to raise capital from a broad base of investors. In the script, the term is central as the Q&A episode is dedicated to explaining IPOs, their purposes, and how they function. For example, the script mentions that companies may go public to raise funds for business expansion, working capital, or debt repayment.

💡Promoters

Promoters are the founders or initial investors in a company who are instrumental in setting up the business. They often retain a significant stake in the company even after it goes public. In the context of the video, the script explains that promoters might sell their shares during an IPO to diversify ownership or to comply with regulatory norms, which is a common practice and not necessarily a negative signal for investors.

💡Subscription

Subscription in the context of an IPO refers to the process where investors apply to buy shares when a company goes public. The script mentions that the level of subscription can indicate the demand for the IPO, with oversubscription indicating high demand. For instance, the video discusses how one can check the subscription levels on various financial websites to gauge investor interest.

💡Book Building

Book building is a process used in IPOs where the price of the issue is determined based on investor demand. Investment bankers or consultants gather bids from potential investors to determine a suitable price range. The script explains this concept by likening it to a consultant going door-to-door to gauge potential investors' willingness to pay for shares, which helps in setting the price band for the IPO.

💡Price Band

A price band in an IPO is the range within which the final issue price of the shares will be fixed. It is determined using the book building process and is a way for companies to gauge market sentiment and investor interest. The script uses the example of Prince Pipes IPO, which had a price band of 177 to 178, indicating the range within which the final issue price was to be decided.

💡Anchor Investor

Anchor investors are large institutional investors who commit to buying a significant number of shares in an IPO before it is open to the general public. They are required to hold their shares for a specified lock-in period. The script explains that while there is no lock-in period for retail investors, anchor investors have legal compliances that restrict them from selling their shares immediately after listing.

💡Debt Repayment

Debt repayment refers to the use of IPO proceeds to pay off existing loans or debts. The script suggests that using IPO funds for debt repayment is not inherently negative and can improve a company's profitability by reducing interest burden, thus making it an attractive investment opportunity for some.

💡HNI (High Net Worth Individual)

HNI stands for High Net Worth Individual, a term used to describe investors who have a substantial amount of capital to invest. The script discusses the HNI category in IPOs, where such individuals can apply to invest more than a certain amount, typically two lakh rupees in India. It also touches upon the misconception that investing as an HNI increases the chances of allotment, which is not necessarily true.

💡Listing Day

The listing day is when the shares of a company that has gone public start trading on the stock exchange. The script clarifies that there is no restriction for retail investors to sell their shares on the listing day, unlike anchor investors who are subject to lock-in periods. This is an important aspect for investors to consider when deciding whether to invest in an IPO.

💡Fixed Price Issue

A fixed price issue is an alternative method to book building, where the company sets a specific price for its shares during an IPO. Unlike book building, where the price is determined based on investor demand, in a fixed price issue, the company decides the price without seeking investor input. The script contrasts this with book building as one of the types of IPO issues.

Highlights

Introduction to the Q&A episode focused on IPOs.

Explanation of IPO meaning and its purposes.

Discussion on how to check IPO subscription levels on Chittorgarh.com.

Addressing the concern about promoters using IPO funds to pay off debts.

Explaining the concept of promoters selling their stake and its implications for investors.

Clarification on the ability to sell allotted stocks on the listing day.

Description of the anchor investor's role and lock-in period.

Differentiating between IPO and secondary market investments.

Announcement of the expected HDB IPO in 2020.

Definition and process of book building issues in IPOs.

Comparison between book building and fixed price IPO issues.

Mention of additional resources for learning about stock market basics.

Encouragement for viewers to subscribe and share the video for educational purposes.

Closing remarks and a call to action for viewers to enhance their knowledge in 2020.

Transcripts

[Music]

hi guys see Alison are already here and

I welcome you all to my new episode Q&A

episode especially which is dedicated

for IPOs recently there was a spot in

the number of IPOs

wherein we could see two three IPOs

coming back to back in fact I released a

separate video on prince pipes IPO as

well pretty recently so I

there are many viewers who are asking me

a lot of questions about IPO so I

thought of collecting all these

questions and making a separate Q&A

series ask Krishna show for IP so let's

start right away the very first question

is by Sangeeta Agarwal hi Sangeeta and

the question is can you also explain the

meaning of IPO okay so IPO in short

version is nothing but when the

promoters of the company want to raise

additional funds what could be the

purpose purpose could be different

purpose could be number one they want to

expand the business purpose number two

they want money for their working

capital but so working capital means

day-to-day running of the business

purpose number three could be even let's

say they have taken a lot of debts okay

they have taken a lot of loans and I

want to repay the loans purpose can be

anything the moment they want more money

from a lot of different category of

investors which could include people

like you and me it could include banks

it could include big financial

institutions then the company comes up

with an initial public offer okay so I

hope initial public offer is simple it

is when the company offers shares to

people like you and me for the very

first time that's known as an initial

public offer if a second round of

funding is demanded by the company then

it is called as a FPO

it is called as a further public offer

or sometimes called as a follow-up

public offer us also I hope this one is

clear second question is asked by Manju

not gargy and so hi one unit and the

question is how do we know how much is

the IPO subscribed on the last day where

do we get this information let us go

through one by one so this is this

website Chittorgarh calm its

she thought over is a place in Rajasthan

I don't know what is the connection but

so

beautiful site as far as the IPOs are

concerned okay again this is not a

sponsored video budget order I genuinely

feel it's a good one as far as IPOs are

concerned

okay so I'll show you a quick example

for example og one small finance bank

and if you want to know how much was

subscribed on what day okay so I just

tapped on that then you have something

known as subscriptions like I just click

on that I scroll down and then I come to

this small section which says on

December 2nd how much the issue was

oversubscribed for example the qib

portion was subscribed 0.23 times but on

the very first day retail version was

subscribed eight point six one types

that's huge December 3 whatever December

4 whatever so just to give you a rough

idea rough idea total is like one

hundred and sixty five point six six

times and what does this mean if company

has offered one hundred and six has

offered one share ok company wants to

sell one share 165 is the demand it is

that big okay and this goes on updating

every single day it generally gets

updated in the evening ok so that's

where you can check it very easily it's

a free website it's not a pain website

second question which is asked is we

heard that promoters are paying off some

bad debts using this money raised is

that true will this be considered as a

risk factor okay

so paying debt with money that you are

raising from shareholders is not bad at

all assume that the company is doing

very well their operating profit is

fantastic

okay so just as an example by selling

100 rupees of products assume that their

profit operating profit is let us say

rupees 40 but out of this 40 50 rupees

you have to pay off as interest on loans

then you finally go into a loss of 10

rupees okay in spite of having a good

operating profit you are at a 10 rupees

loss towards the end so to reduce such a

risk what companies do is that they

might come up with an IPO they you they

would use this money to repay the debt

okay and that is why what will happen

their profitability will increase so if

a company has a very good operating

profit but if they have a low-fat or a

negative part just because of the

interest on loans

I feel it should not be a problem at all

you can very well invest into such a

company of course looking at other

parameters as well next question is

asked by Sun Moon star okay so the

universe

kaboo love me okay anyways I am running

out of any spot right now Sun Moon star

okay

why promoters are selling their stake

isn't it a risk factor that investors

should consider okay I'll give you a

simple example assume that I start a

company in this year and I start a

company with a face value of 10 rupees

so I've put in 10 rupees from my pocket

I raised money I raise capital for my

business I purchase certain equipments

the recording equipments everything and

I started my business okay I'm running

the business two years down the line

three years down the line five years

down the line ten years down the line

okay now what happens is that my brand

name has grown now Wow let this happen

but let's say my brand name has grown

after whatever ten years why ten years

also five years is also fine with me

okay so after five years let us say I

feel that it's time that my company does

not get restricted to select a few

people but I'm sure like people like you

will also be interested to invest into

my company why not yes you have to say

yes so if that be so I will sell my

shares okay so there are two concepts on

is offer for sale and one is fresh issue

so what I can do is that instead of

instead of issuing freshest okay making

freshest issuing them to you I might say

that I will sell my own shares to you

okay

one more important point is that when

promoters are selling their stake first

I feel it could be even because of semi

norms as for semi guidelines you are not

as a promoter you are not allowed to

hold more than 75 percent shares in your

own company that's as per the current

laws okay so I hope you have understood

this promoter selling their stake is not

bad at all Ramesh Krishnan wanna come hi

ma'am I am a beginner in stock market I

have doubt regarding IPO can we sell the

allotted

stocks on the listing day or there is

any restriction like lock-in period for

their other stocks now there is no

lock-in period at all but just for an

added piece of information there is

something known as an anchor investor

okay so anchor investors have to be

locked into the IPO for some X number of

years it could be 1 year 2 years 3 years

there is a legal compliance for that

okay so you can check that out but just

to visualize this concept so like assume

this is a boot and the so the board

should not go or flow away in the water

you have something on as an anchor okay

the anchor holds the boat tightly

similarly an anchor investor holds on to

the shares tightly they're not allowed

to sell on the listing day okay so maybe

the name is derived from anchor which

holds the ship an anchor investor holds

onto the shares they are not allowed to

sell on day one okay there's a semi

guideline for that as to how early they

can sell off the shares I hope this is

clear as well so next question is about

okay first it is asked by Natarajan Babu

what is a Chennai category can anyone

apply in that band and will it increase

my probability of getting the IPO if it

were in high demand I kindly talk about

this in the Oscar national show want to

try that band in SBA card IPO okay so

nitrogen understand a Chennai is high

net worth individual category you might

be getting a feeling that what is there

in her hand the problem is that there is

a construction going right next to our

building I don't have a soundproof

studio till now so we generally work in

proper timing so that there is less

disturbance in the video but today the

workers are refusing they're there

they're like very enthusiastic maybe

they have listened to my video and

they're fully charged up they want to do

their work like pull on so I have no

other option but to take one more Mike

maybe I'll be clearer and louder so with

that let me continue my show a nut

Ranjan nut rajanbabu has as the next

question he says what is a Chennai

category can anyone apply in that band

will it increase my probability of

getting the IPO if it was in a very high

demand kind of talk about this in the

ask Krishna show want to try that in SBI

card IPO okay fair enough a Chennai is

known as a high net worth individual

category and people who want to invest

for more than 2 lakh rupees in a

specific IPO then they are called as the

a Chennai individuals so in a Chennai

individuals do you know which people

come it's like it could be like such an

Tendulkar Amitabh Bachchan Shahrukh Khan

not rajanbabu all these people will come

in the a Chennai category right

so these are the ones who can who can I

mean who may they have a choice to apply

for more than two legs okay so that's

the category

it does not definitely increase your

probability of getting the IPO because

please understand if retail individual

investors are applying in such a big

number

hñ eyes are also going to apply in that

big number because the number of shares

that will be applied in the hni category

is going to be equally high or maybe a

little bit higher so I don't think it

would be a wise decision to invest in

the hni category so next question is by

jebin

a Chun a Chen could you a Chan could you

baby

okay jebin a chunk hoon do baby sorry if

I pronounced wrongly can you talk about

IPO versus share what are the advantages

and disadvantages of having a juvenile

or share okay so if I'm talking about

IPO versus share IPO is like you're

getting a chance to invest in the share

for the very first time

if the IPO comes at a good price then

generally you you get up I mean you have

a probability of getting a good return

in a short span of time just as an

example there was an IPO for one of the

rating agencies whose IP had come up at

300 rupees and it got listed almost

around at 900 rupees same happens with

Demark same happened with IRCTC handsome

gains so if you are talking about

investing in secondary market you might

not get a very big amount right away in

one day or two but again that that all

depends because there are many IPOs

which get listed at a price lower than

its actual price also okay so I can't

give you a single thumb rule answer for

your question yeah so that's it so would

you an IPO or share if you have not

gotten would you an IPO in your initial

allotment then you can think of buying

the share in the secondary market also

that's fine

okay so next question is by a mr. Dilip

D hello ma'am when is the HDP IPO coming

I think it's HDB will you please provide

a presentation on that it is expect to

expect it to come in 2020 but the date

has not yet been announced so let's see

so another better next question is by a

Salvation Wow what names today I'm

reading on Sun Moon stars and all that

thanks for the amazing

what is book building issue what are the

other types of IPO shoes can be there oh

that's a good question

I feel again it's good that you were

asking and it's good that I'm explaining

anyways I do have a separate series on

basics of stock market do check out my

link my website is Rukhsana run array

dot in i have taken a separate series

you many of you might be knowing but

just for just in case if you don't know

about it I've talked about sixty

five-plus concepts about stock market

and in that I guess two full lectures

that's like more than three as I have

talked only about IPOs so much much more

in detail this question is on what is a

big book building issue book building

issue is basically it's a big one to

explain but cut down cut it in doubt

down and short it's an issue where the

merchant bankers okay much in my

cousin's simple words I can put them as

consultants okay consultants will try to

find out what could be a price band okay

so it's it's um it's a very crude way of

explanation okay but I can imagine

somewhat something like this a

consultant goes door-to-door this does

not happen but just understanding

purpose Kelly a consultant goes

door-to-door and asks that if you were

to buy HDB IPO LDP IPO how much would

you be ready to pay for that the

consultant gives an it gives a

presentation then a specific price will

be quoted by the customer he would do

several such presentations several such

prices will be quoted based on these

prices the consultant who is a merchant

banker which would fix a price band okay

so lower band upper band so just to give

you an example Prince pipes it had fixed

at 177 to 178 that's a price band okay

and you're in who gets the opportunity

to finalize the final price the

opportunity to fix the final price is

given to people like you and me

so company can't decide whether it's 178

or it's 177 or what they just give a

price band we have to choose what price

we are opting for okay one other type of

issue she has asked for or he or she

whatever salvation has asked for other

type of IPO shoes fixed price issue

their company says we are offering

shares at two hundred rupees period we

are not asking you whether two hundred

to two

three what should be the actual price

that would be a fixed price issue okay

so two types of issues book building

issue fixed price issue but more popular

is book building issue well that's it

from my side I hope you have liked this

Q&A IPO special which I did after a long

time I guess in the new year we are

applying lot more video series so I hope

you have subscribed to my channel and I

hope you are sharing my videos to many

of your friends so keep sharing keep

viewing keep watching try enhancing your

knowledge as much as possible keep that

as a target for yourself in your 2020

that you will watch a lot of my videos

and you will share it to maximum of your

friends yes so that's it from my side

Jai Hindi bye

[Music]