The Initial Public Offering or the IPO is the first time when a company or an organization issues shares to the public after it gets listed.I have already written in a post regarding why does a company issues its shares to the public.To start with the job the company needs to hire an investment Banker to underwrite the issue.The underwriter accomplishes this by purchasing shares from the company at a predetermined price and then reselling them to the public for a profit.

These days the shares are issued by the Book Building process.It is the process of price discovery.That means there is no fixed price for the shares.Here the company issuing the share gives a price-band.The lowest price is usually called as the floor price and the upper price is called the cap.Say for example a company X issues its shares in the price band of Rs 300-450.So 300 is the floor price and 450 is the cap.Then Bids are invited for the shares wherein the investor decides how many shares he needs and the price at which he is willing to buy the shares which is in between the price band.The actual price is then decided based on the bid prices.

Now every company which wants to come up with its IPO needs to file its prospectus with SEBI which has all the details that an investor wants before he goes for the IPO like company financial  position and why it is coming up with an IPO.Then Comes the Red Herring Prospectus which is generally a draft offer document.So it is a offer document used in Book Building processes.

Now comes the question who and all can invest in IPOs.They are basically divided into 3 categories.

1.The qualified institutional buyers which consists of FIIs or foreign institutional investors and mutual fund organisations.Generally 50% of the shares are reserved for them.

2.Retail Investors which consists of anyone bidding for shares under Rs 50,000 and 25% of the shares are reserved for them.

3.The balance is then issued to the company employees and some high net worth individuals.

Please note one thing here that it is not necessary that a investor is allotted the number of shares  he or she bids for.Say for example if a investor bids for 1000 shares and the share gets over subscribed 10 times then he is entitled  to only 100 shares(i.e  1000/10).

IPOs are seen as very good time  for investments since if the  financial position of the company is in a good form then the shares of the company gets appreciated very soon which we have seen in recent times.Here i have tried to discuss as much as possible still if the readers have any questions in their mind feel free to leave a comment they will be answered very soon.

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