Initial Public Offer - Introduction

Introduction

Public issues can be classified into Initial Public Offering and further public offerings. In a public offering, the issuer makes an offer for new investors to enter its shareholding family. The issuer company makes detailed disclosures as per the DIP guidelines in its offer document and offers it for subscription. Initial Public Offering (IPO ) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities.

IPO is New shares Offered to the public in the Primary Market .The first time the company is traded on the stock exchange. A prospectus is issued to read about its risk before investing. IPO is A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally must be prepared to accept very large risks for the possibility of large gains. Sometimes, Just before the IPO is launched, Existing share Holders get a very liberal bonus issues as a reward for their faith in risking money when the project was new

How to apply to a public issue ?

When a company floats a public issue or IPO, it prints forms for application to be filled by the investors. Public issues are open for a few days only. As per law, any public issue should be kept open for a minimum of 3days and a maximum of 21 days. For issues, which are underwritten by financial institutions, the offer should be kept open for a minimum of 3 days and a maximum of 21 days. For issues, which are underwritten by all India financial institutions, the offer should be kept open for a maximum of 10 days. Generally, issues are kept open for only 3 to 4 days. The duly complete application from, accompanied by cash, cheque, DD or stock invest should be deposited before the closing date as per the instruction on the from. IPO's by investment companies (closed end funds) usually contain underwriting fees which represent a load to buyers.

Before applying for any IPO , analyse the following factors:

1. Who are the Promoters ? What is their credibility and track record ?

2. What is the company manufacturing or providing services - Product, its potential

3. Does the Company have any Technology tie-up ? if yes , What is the reputation of the collaborators

4. What has been the past performance of the Company offering the IPO ?

5. What is the Project cost, What are the means of financing and profitability projections ?

6. What are the Risk factors involved ?

7. Who has appraised the Project ? In India Projects apprised by IDBI and ICICI have more credibility than small Merchant Bankers

Criterias:

The main criterias to be considered before investing in an IPO are:

1. Liquidity,

2. Safety,

3. Returns,

4. Involvement and

5. Amount of investment.

1. Liquidity:

For investing in an IPO the investor has to keep in mind that he has applied for shares of an organisation and that has to be approved by that company. There is a time gap between the date he has applied and date the company approves his application. The company allots shares in his name, either the full quantity of shares he applied and reduced units of shares.

Some of the companies which opened offer and listed last year are given in the table below.

Company Name	IPO opening	Listing from	Credit rating
Future capital holdings Ltd.	January 11th 2008	February 1th 2008	Grade - 3/5
Reliance Power Ltd.	January 15th 2008	February 11th 2008	Grade - 4/5
J. Kumar Infraprojects Limited	January 18th, 2008	February 12th, 2008	Grade - 2/5
OnMobile Global Limited	January 24th, 2008	February 19th, 2008	Grade - 4/5
IRB Infrastructure Developers Limited	January 31th, 2008	February 25th, 2008	Grade - 4/5

There fore in all the above cases the time gap between the IPO opening and listing in secondary market is on an average of 20 - 25 days. The investor has to keep this in mind that his investment will locked in the name of shares in the company and that can be released only on the date of listing. That is for about 25 days his investment will be locked in.

There is another case where the investors can trade the shares alloted in his name in the gray market. Even though this kind of trading the stocks is illegal, the trading of shares continues to happen.

2. Safety:

If the money invested by the investor is secured enough which will fetch back in a considerable period of time is said to be a safer investment. The invested money in the IPO will be taken back only after it is being listed in the secondary market. Not only it should be fetched back, the money invested should come back with some profit because it is been locked up for a particular period of time. And only if the credit rating of the company is good, the value of the shares of the company will gain some interest with the investors and the share value will rise and the investor can get back his investment.

3. Returns:

The returns criteria is a worrying thing only for the investors who expect it within a short period. If the investor cares about the returns then he should invest for a particular period of time. And that too in this scenario of economic conditions the investor may not be getting back his investment. This situation may not be happening for all the companies. Only those companies which fails to attract the investors, which are not finding business and able to make profits, will disappoint the investors from getting back money invested.

Name	Issue price (Rs.)	Listing day prices (BSE/NSE) (Rs.)	Current market price (Rs.) as on 28.Feb.2009
Future capital holding Ltd.	765.00	1044.00 / 1081.00	120.35 / 120.70
Reliance power Ltd.	450.00	547.80 / 530.00	99.70 / 99.95
J. Kumar Infraprojects Ltd.	110.00	100.00 / 109.00	55.05 / 55.00
OnMobile global Ltd.	440.00	440.00 / 440.00	235.35 / 230.00
IRB Infrastructure Developers Limited	185.00	170.05 / 194.90	99.70 / 99.90

The companies in the above listed table, have fetched only losses in the long term. This is because of the financial crises and the deep fall in stocks. So this clearly tells that the that the money invested by the investors are not safer enough to get back the money invested.

4. Involvement:

The involvement needed before investing into the IPO is very much based on the experts view. If the company is already existing then its financial statements can be used to compute the worth of the company. If the company is relatively new then the credit rating for the company and the view of experts on the company, company's future prospects are to be analysed before investing.

5. Amount of investment:

There is a maximum limit fixed by the company up to which the individual investors can invest in. Even if the investor is willing to invest more amount, he cannot invest because of the regulations fixed by the registrar.