All about IPOs – why and how they are launched and how to apply

Posted by aarav badhe on October 22nd, 2019

Raising capital is integral to run a company smoothly. Companies raise capital for several different operational reasons including business expansion, purchasing new equipment and hiring employees. Capital is raised in different ways such as taking on loans from banks and non-banking financial companies, debentures, and providing a stake in the company to interested investors. If a company opts for any of these above mentioned methods of raising capital, it can continue serving as a private company, but when it decides to raise fund from the public, it becomes a publicly traded company. This is where an IPO comes into the picture. Here’s why and how IPOs are launched and how to apply for IPO.

IPO definition

Initial Public Offering or IPO is a way in which companies can raise capitals. An IPO allows a company to sell a stake or share to investors, in exchange for money. To raise money from the public, a company need to get listed on the primary market. If an investor is interested in purchasing shares of a private company intending to “go public”, they need to apply for the IPO. Once the IPO is launched, a formerly private company becomes a publicly traded one and investors can then purchase shares of the company at any time on the secondary market.

How an IPO is launched

Before you can understand how to invest in IPO, it is important to know how IPOs are launched. Here’s what happens:

• A privately traded company “goes public” with the IPO launch. To this end, they need to first hire an investment bank, also known as an ‘under-writer’. The company intending to go public is referred to as the ‘issuer’.
• The under-writer conducts a detailed analysis of the financial health of the company intending to go public. It tries to understand a company’s assets and liabilities before formulating a strategy to launch the IPO.
• The issuer and the under-writer then enter into an agreement, under which the company agrees to sell its shares to public investors on the stock exchange. There are two main types of Stock Exchanges in India – NIFTY and SENSEX. While NIFTY is essentially an equity benchmark, consisting of 50 actively traded stocks on the National Stock Exchange, Sensex meaning is defined as an equity benchmark, consisting of 30 actively traded stocks on the Bombay Stock Exchange.
• Now, the company and the investment bank must send the signed agreement to the SEBI, which approves the company’s request to launch the IPO.
• The IPO is later opened to the public. 

How to apply for IPO

As an investor, you can choose to apply for IPO when a company announces its intension to launch it. Find out how to invest in IPO below:

• Procure the IPO application form. You can find the application form on the official website of the company launching the IPO or at the office of your investment broker’s company.
• You must fill the application form, providing the necessary details such as your name and contact details, and the maximum amount you wish to invest.
• You must provide your bank account details for debiting the sums to purchase the shares.
• Once the IPO is listed on the stock exchange, you are allotted your shares.

Final Word: You are informed about the number of shares allotted to you, a few days after the IPO goes public. The allotment of shares is done on the basis of the demand generated by the IPO among investors. To understand how IPOs work you should familiarise yourself with what is Sensex and NIFTY since shares are traded on these two exchanges.