Table of contents
Introduction
IPO (Initial public offering) investments are popular and well-recognised among market players. An IPO is the debut of a company on the stock exchange. You must have heard about it for sure. However, what exactly is an IPO and what are the different types of investors in IPO? To get the answer to all these questions, all you have to do is scroll down!
What is an IPO?
An initial public offering (IPO) is when a private company sells its shares to the public for the first time. The company shares are offered to the public in exchange for capital. The company can use the money for expansion, to pay off debt, for machinery purchases, etc..
To become public, private companies work with investment banks to introduce their shares to the public market. This process requires extensive due diligence, marketing, and regulatory compliance.
Many people consider IPOs as opportunities to make a profit. IPOs are useful for short-term profit as well as for long-term investments. For companies, here are key benefits.
Public visibility and credibility
Going public can enhance a company’s public image and credibility. Being listed on a stock exchange often provides a level of transparency, and it can be seen as a sign of confidence in the company’s future prospects.
Capital for growth and expansion
The primary purpose of an IPO is to raise capital for the company’s growth and expansion. By investing in an IPO, you are supporting the company’s ability to fund new projects, research, acquisitions, or other strategic initiatives.
Different types of IPO investors
As per the SEBI, four types of investors in IPO market can bid for shares during the IPO process.
1. QIIS (Qualified Institutional Investors)
Qualified institutional investors are commercial banks, public finance institutions, mutual fund companies and foreign portfolio investors registered with SEBI. These are crucial for any company that is coming up with an initial public offering.
Before the IPO officially begins, underwriters attempt to sell a significant amount of IPO shares to the QII at a profit to make fewer shares available to the public. If the QII purchases more shares, the share prices rise.
2. High net-worth individuals (HNIs) / Non-Institutional Investors (NII)
Individuals who invest more than Rs 2 lakh are categorised as High Net Worth Individuals (HNIs). Similarly, institutions that want to invest more than Rs 2 lakh are known as non-institutional investors (NIIs).
The main difference between Qualified Institutional Investors (QII) and NIIs is that the latter don’t need to register with SEBI. When shares are allotted to HNIs/NIIs, it is done on a proportionate basis.
For example, if someone applies for 10,000 shares and the issue is oversubscribed 10 times, they will be allotted 1,000 shares (10,000/10). This ensures that they always receive some shares, regardless of whether the issue is oversubscribed or not.
Additionally, around 1-2% of shares are usually set aside for employees as a way of rewarding them for taking the risk of being associated with a new company.
3. Retail investors
Retail investors in IPOs invest less than ₹2 lakhs. The minimum allocation for retail investors in an IPO is 35% of the total shares offered. According to SEBI, in the event of oversubscription, all retail investors shall be allocated at least one lot of shares. If one lot per investor is not practicable, shares are distributed to retail investors via a lottery mechanism.
Retail investors in an IPO have an opportunity to select stocks and invest at a competitive rate. Dividends or bonuses are paid based on the company’s earnings and the management’s performance. As a result, ordinary investors can make long-term profits.
4. Anchor investors
The market watchdog, SEBI, created this new class of investors in 2009. This type of investor can invest in an IPO through the book-building procedure for a value of at least ₹10 crore. Anchor investors may purchase up to 60% of the shares set aside for QIIs.
Direct relatives, promoters, and merchant bankers are prohibited from applying under this group. The chance to submit an IPO application before the offering is made public helps in getting investors and winning over customers before the IPO becomes public.
Why invest in an IPO?
Now that you know the different categories of investors in IPO, let’s see some of the advantages:
1. Early access to growth
IPOs typically involve companies that are in their early stages of growth and expansion. By investing in an IPO, you have the opportunity to get in on the ground floor of a potentially successful company before it becomes widely known.
2. Potential for high returns
Successful IPOs can provide significant returns on investment, especially if the company experiences strong growth in the months or years following its public debut. Investors who are able to secure shares at the IPO price may benefit from the appreciation of stock value over time.
3. Liquidity
Once a company goes public, its shares are listed on a stock exchange, providing investors with the ability to buy and sell shares easily. This liquidity can be attractive to investors who prefer having the flexibility to exit their positions when needed.
4. Diversification of investment portfolio
Including IPOs in an investment portfolio can contribute to diversification. If the IPO company operates in a different sector or industry than your existing holdings, it can help spread risk and reduce the impact of poor performance in any single investment.
5. Access to high-profile companies
IPOs often involve well-known and high-profile companies. Investing in these companies can be appealing to investors who want to be associated with industry leaders or companies with strong brand recognition.
Conclusion
The success of an IPO depends on the collaboration of various investors. Retail investors, Anchor Investors, high net worth individuals (HNIs), and QIIs all play unique roles in an IPO listing. Their collective participation not only shapes the IPO’s outcome but also reflects the diversity and strength of the financial market. To learn more about such financial concepts, stay tuned to StockGro!
FAQs
An IPO, or Initial Public Offering, is the process through which a private company becomes public by offering its shares to the general public for the first time. It involves issuing new shares to raise capital and allows the company to be traded on a stock exchange.
IPO participation is open to a variety of investors, including Anchor Investors, retail investors, Qualified Institutional Investors (QIIS), and high-net-worth individuals (HNIs). Each category may have specific eligibility criteria and allocation methods.
IPOs are significant for companies as they provide a means to raise capital for expansion, acquisitions, and other business activities. Going public also enhances a company’s visibility, credibility, and liquidity, allowing existing shareholders to sell their shares and offering employees stock options.
Underwriters play a crucial role in the IPO process by assuming the financial risk of purchasing the shares from the issuing company and reselling them to the public. They help set the IPO price, manage the issuance, and ensure a smooth transition to the public market, assisting in mitigating potential risks for both the company and investors.
As an investor, you can invest in a company going public at a competitive rate and benefit from price appreciation. You also get access to quality companies and this can help in long-term wealth creation.