#9 How and Why Companies Go Public

In today’s edition, we’re going to talk about Initial Public Offerings (IPOs), and the steps involved for a company going public, and why it should matter to you.

I first learnt about IPOs during when I was on a walk with my dad, and had read on InShorts about how Uber was going public. And my literal first thought was, “Doesn’t everyone like already know about Uber?” (don’t ask me how old I was at this stage 😝 ). I asked my dad about this, as I do for everything, and he explained as much as he himself knew about it. It was then that I got interested into IPOs.

Since then, I have noticed how some companies use the words Private Limited vs how some just say Limited. This is the first step for a company heading for an IPO, to convert itself from a private to a public entity. Why do they want an IPO though? Because companies want to raise equity capital. What do investors get in return? Shares of the company.

Let’s understand through the example of a recent company going public, called Allied Blenders and Distillers Limited (ABD):

• Firstly, the company hires an underwriter in the form of a bank, who then acts as the book running lead manager (BRLM) , which in the above case are ICICI Securities, Nuvama and ITI Capital Limited. The BRLMs are then responsible for the book building process, which involves setting the price band, the lot size etc.

• The company at this stage also needs to decide how much money they want to raise, and how much equity in return they are willing to give. Allied Blenders is aiming to raise 1500 crore INR via the issue, against 1.59 crore shares.

• The next step is to submit the Draft Red Herring Prospectus (DRHP), which is a document that introduces the company to potential investors (technical jargon).

• The Securities and Exchange Board of India (SEBI) then verifies all the information and applies for listing with Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

• Then, roadshows are conducted which basically entail presentations and meetings by the company’s management to potential investors.

• Now, we come to the part which matters to us, the price range and the lot size. The price range for the above IPO was set as 267 - 281 INR, with a lot size of 53 shares. This means the minimum investment required is between 14,151 INR to 14,893 INR for a retail investor. The maximum limit for retail investors in IPOs is set as 2,00,000 INR.

• Most IPOs are open for a three - day period, and you can apply only within the time frame of 10am and 5pm. You also need a demat account with either the National Securities Depository Limited (NSDL) or the Central Depository Securities Limited (CDSL) as well. The bid for Allied Blenders was open from 25 June to 27 June.

• Now comes the fun part. You, or anyone else, have absolutely no control on whether you’ll be allotted a lot or not. The allotment process is completely random and moves towards a lucky draw, in the case of over - subscription (number of applications exceed the number of shares offered or more simply, demand exceeds supply), which is most often the case. The allotment process for Allied Blenders will start today.

• Finally, comes the D-Day, i.e., the listing day, which decides whether you’ll make money or not. The IPO of Zomato saw a premium (profit) of 52% on listing day, while some like Entero Healthcare Solutions saw a discount (loss) of over 2.3% (guess which one I had 🥹 ) . What happens with Allied Blenders in this regard is yet to be seen.

There is somewhat of a way around this. You can check the Grey Market Premium (GMP) which tells you the expected listing price of the IPO. The GMP for Allied Blenders is around 88 INR, expecting a 27% premium.

I apologize if too many technical terms were introduced in the edition, but I hope the next time an IPO comes, or you decide to pick up the Economic Times, you won’t be as intimidated as I was while seeing the IPO ads.

Disclaimer: This is not investment advice by any means. This is just to help people understand IPO as part of financial markets.

Ather, Ola Electric, Swiggy, Hyundai, Emcure Pharma as expected to go public soon, amongst many other companies. Which of these IPOs would you apply for?

Let me know in the comments, or reply back to this email!

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