IPO Pricing Information

Pricing of IPO


1] What is IPO? Explain in detail the methods of pricing IPO.

An Initial Public Offering (IPO) refers to “offering” or “flotation”. The company (issuer) issues shares to the public for the first time. They are often issued by smaller, new companies seeking capital to expand the business activities. It is also done by large private companies looking to become public.

The following are the methods of pricing:

A] Book Building method:

Book Building is essentially a process used by companies raising capital through Public Offerings, both Initial Public Offers (IPOs) or Follow-on Public Offers (FPOs) to aid price and demand discovery.

Following are the process involved in Book Building Method:

i) The Issuer who is planning an offer nominates lead merchant banker as ‘Book Runner’.

ii) The Issuer specifies the number of securities to be issued and the price band for the bids.

iii) The Issuer also appoints ‘Syndicate Members’ with whom orders are to be placed by the investors.

iv) The syndicate members input the orders into an electronic book. This process is called ‘bidding’ and is similar to open auction.

v) The book normally remains opens for a period of 5 days.

vi) Bids have to be entered within the specified price band.

vii) Bids can be revised by the bidders before the book closes.

viii) On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels.

ix) The book runners and the Issuer decide the final price at which the securities shall be issued.

x) Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share.

xi) Allocation of securities is made to the successful bidders. The rest get refund orders.



B] Underwriter:

The IPOs involves one or more investment banks known as ‘Underwriters’. The company offering its shares, called the ‘issuer’, enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.

A large IPO is usually underwritten by a ‘syndicate’ of investment banks led by one or more major investment bans (lead underwriter). The underwriter keep a commission on selling of the shares based on a percentage of the value of the shares sold, which is called the ‘gross spread’. On selling highest proportion of the shares, the lead underwriters take maximum commission upto 8%.

The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the green show or over allotment option.

C] Auction: This method is also called as Dutch Auction under which, a company reveals the maximum amount of shares being sold and sometimes a potential price for those shares. Investors then state the number of shares they want and at what price. Once a minimum clearing price is determined, investors who bid at least that price are awarded shares. If there are more bids than shares available, allotment is on a pro-rata basis--awarding a percent of actual shares available based on the percent bid for or a maximum basis, which fills the maximum amount of smaller bids by setting an allocation for the largest bids.

Google's $2.7 billion initial public offering, was priced through an electronic auction, which tested the large-scale viability of a so-called Dutch auction, designed to both democratize IPO share allocation and afford companies and early investors the best price for their shares.



2) What is Listing of Shares? What are the advantages of Listing of Shares?

Listing of securities means grant of approval for dealing in certain securities (shares and debentures) at a stock exchange. In other words it means admission of securities of an issuer (company) to trading privileges at a stock exchange through formal agreement.

The main objective of listing of securities on stock exchange is to provide liquidity and marketability to securities and also to provide a mechanism for effective management of trading. However, listing is not compulsory for companies not making public issue of shares and debentures.


Advantages of Listing:

The following are the benefits of listing of securities in a Stock Exchange:

a) A premier marketplace: The sheer volume of trading activity ensures that the impact cost is lower on the Exchange which in turn reduces the cost of trading to the investor. The automated trading system ensure consistency and transparency in the trade matching which enhances investors confidence and visibility of our market.

b) Visibility: The trading system provides unparallel level of trade and post-trade information. The best 5 buy and sell orders are displayed on the trading system and the total number of securities available for buying and selling is also displayed. This helps the investor to know the depth of the market. Further, corporate announcements, results, corporate actions etc are also available on the trading system.

c) Unprecedented reach: Stock exchanges provide a trading platform that extends across the length and breadth of the country. Investors from number of centres can avail of trading facilities. The Exchange uses the latest in communication technology to give instant access from every location.

d) Value addition: A listing can also be anticipated to attach importance to a company's Employee Share Ownership Scheme. In addition, a listing on a stock exchange can add value to a company. A listing could press forward brand awareness of company products and can augment a company's corporate standing. Furthermore, the superior profile, tied with larger lucidity, could add to the company's capacity to have access to traditional sources of capital.

e) Increasing capital: The Stock Exchange makes available access to a collection of institutional and retail investors and to the capital market. A registration on the exchange allows a company to raise capital and use it to sponsor investment and expansion. Even after a company is listed, it can boost up capital from the market, through the issue of fresh securities such as Rights issues or through the issue of a new nature of securities.

f) Access to a widespread shareholder base: The stock exchange puts forward companies a right of entry to a wide-ranging and mounting investor base, which contains both entity investors and plentiful local and international institutional investors.

g) Price Detection: A listing facilitates companies to ascertain a price for their shares.

h) Low cost capital: The primary gain of raising capital from the market is that it eschews a number of the intermediation expenses apparent in the other forms of capital raising. Consequently, the market endows companies with capital at a cheaper cost.

i) Corporate Information’s: The stock exchanges used to disseminate information and company announcements across the country. Important information regarding the company is announced to the market through the Broadcast Mode through the websites of the stock exchanges. Corporate developments such as financial results, book closure, announcements of bonus, rights, takeover, mergers etc. are disseminated across the country thus minimizing scope for price manipulation or misuse.



Consequences of Non-listing:

In case the company has not applied for listing or one or more recognized stock exchanges have not granted permission before the expiry of ten weeks from the date of closure of subscription list, them the following consequences follow:

a) Any allotment of shares and debentures to an applicant shall be void,

b) Any application money collected is to be refunded without interest within eight days after the company become liable to repay it,

c) After the expiry of the eighth day, the company and its every officer shall be jointly and severely liable to repay the amount with interest at prescribed rate.

3) Explain Stag Profit:

Stag profit is a stock market term used to describe a situation before and immediately after a company’s IPO or any new issue of shares. A stag is a party or individual who subscribes to the new issue expecting the price of the stock to rise immediately upon the start of trading.

For eg. A investor might expect a certain IT company to do particularly well and purchase a large volume of their stock of shares before floatation on the stock market. Once the price of the shares has risen to a satisfactory level the person will choose to sell their shares and make a stag profit.