Intial Public Offer (IPO) Method

INTIAL PUBLIC OFFER (IPO) METHOD

The public issue made by a corporate entity for the first time in its life is called 'Initial Public Offer'(IPO). Under this method of marketing, securities are issued to successful applicants on the basis of the orders placed by them, through their brokers. When a company whose stock is not publicly traded wants to offer that stock to the general public, it takes the form of 'Initial Public Offer'. The job of selling the stock is entrusted to a popular intermediary, the underwriter. An underwriter is invariably an investment banking company. He agrees to pay the issuer a certain price for a minimum number of shares, and then resells those shares to buyers, who are often the clients of the underwriting firm. The underwriters charge a fee for their services. Stocks are issued to the underwriter after the issue of prospectus which provides details of financial and business information as regards the issuer. Stocks are then released to the underwriter and the underwriter releases the stock to the public. The issuer and the underwriting syndicate jointly determine the price of a new issue. The approximate price listed in the red herring (the preliminary prospectus – often with words in red letters which say this is preliminary and the price is not yet set) may or may not be close to the final issue price. IPO stock at the release price is usually not available to most of the public. Good relationship between the broker and the investor is a prerequisite for the stock being acquired. Full disclosure of all material information in connection with the offering of new securities must be made as part of the new offerings. A statement and preliminary prospectus (also known as a red herring) containing the following information is to be filed with the Registrar of Companies:

1. A description of the issuer’s business

2. The names and addresses of the key company offers, with salary and a 5 year business history on each

3. The amount of ownership of the key officers

4. The company’s capitalization and description of how the proceeds from the offering will be used and

5. Any legal proceedings that the company is involved in. Applications are made by the investors on the advice of their brokers who are intimated of the share allocation by the issuer. The amount becomes payable to the issuer through the broker only on final allocation. The allotment is credited and share certificates delivered to the depository account of the successful investor.

The essential steps involved in this method of marketing of securities are as follows:

a. Order Broker receives order from the client and places orders on behalf of the client with the issuer.

b. Share allocation: The issuer finalizes share allocation and informs the broker regarding the same. c. The client: The broker advises the successful clients of his share allocation Clients then submit the application forms for shares and make payment to the issuer through the broker.

d. Primary issue account: The issuer opens a separate escrow account (primary issue account) for the primary market issue. The clearing house of the exchange debits the primary issue account of the broker and credits the issuer’s account.

e. Certificates: Certificates are then delivered to investors. Otherwise depository account may be credited. The biggest advantage of this method of marketing of securities is that there is no need for the investors to part with the money even before the shares are allotted in his favor. Further, the method allows for elimination of unnecessary hassles involved in making a public issue. Under the regulations of the SEBI, IPOS can be carried out through the secondary market and the existing infrastructure of stock exchanges can be used for this purpose.