What are IPOs?

Answer 1

"Initial Public Offerings", which means exactly that, when a stock goes public it is the initial first offering of that stock to the public. Let us say XYZ company wants to go public. (Going public is the word used in market terminology to refer to the event of a company issuing equity shares for the first time) It would file an application with SEBI. If it is filing a request to raise a capital of say Rs. 1 crore, it would be issuing 10 Lac equity shares of face value 10 each.

The terms Face value and Market value would be used through this article. Let us first understand what they are.

Face Value - The Face Value of the share refers to the intrinsic value of a share. This is the value at which the company issues its shares to the common public.

Market Value - Once a share is issued to the public, it would be bought and sold through recognized exchanges like the NSE or BSE. The price at which a particular share is being bought /sold is termed as Market Value.

Net capital Raised by the company = 1,00,00,000/-

No. of Shares issued through the public offering = 10,00,000 (Out of these 10 lac shares, the company would be holding at least 51% that is 5,10,000 shares with itself. The remaining 4,90,000 shares would be available for the public)

When XYZ files its application, based on the profit making capability, its revenue etc the company and SEBI would decide on the market value at which the share would be available for the public to buy. Say for e.g., the share with the face value of Rs. 10/- could be available at the price of Rs. 50/- for purchase through the public offering.

Net Amount raised by the company through the public offering = 4,90,000 * 50 = Rs. 2,45,00,000/-

Every individual who wants to buy the shares of XYZ limited would be filling in forms and paying the amount corresponding to the number of shares they want to buy. Say you want to buy 100 shares of XYZ you would be paying them Rs. 5000/- to buy those 100 shares.

Once the process of issuing shares is over the shares would be allotted to the people who had placed the purchase request. Based on the credibility of the company, the no. of people who place requests to buy its shares would vary. Sometimes the issue could be oversubscribed and sometimes it could be under subscribed. If the issue of XYZ limited was oversubscribed, then you may not get the exact 100 shares that you wanted. You may get a certain

number of shares based on the number of times the issue was oversubscribed.

Say you get 60 shares, then the remaining Rs. 2000/- would be returned to you.

Whatever we have discussed about till now is termed as the "PRIMARY MARKET". The Market in which fresh share offerings given by companies are bought.