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Businesses seeking expansion require capital. Some options in this situation include obtaining loans from financial institutions, sourcing investments from venture capitalists, and even collecting capital from the general public.
Whenever a company is seeking funds from the general public, they have to undergo a process known as the Initial Public Offering and issue a key document known as the prospectus.
In this article, we will explore the fundamentals of IPOs, the types of IPO prospectuses, and why they are crucial for investors.
What is an IPO and its types?
An Initial Public Offering, is the process through which a private company offers its shares to the public for the first time, thereby becoming a publicly traded entity.
Let us look at two types of IPO valuations that exist:
Fixed price IPO
In a fixed-price IPO, the underwriters determine a fixed price for the shares that will be offered to the general public. Investors subscribe to the IPO at this predetermined price.
Book-Building IPO
In this IPO process, the underwriters provide a price range, and investors bid within this range.
What is a prospectus?
It is a document prepared by a company that intends to go public. It provides detailed insights into the company’s operations, financial health, risk factors, and plans so that the company can undergo a public issue through the prospectus.
Types of an IPO prospectus
Here are the types of IPO prospectus of a company that exist:
Red herring prospectus
It serves as an offering document utilised in book-built public issues. It encompasses all pertinent information except for the details concerning the price or quantity of shares offered. This document is submitted to the Registrar of Companies (RoC) before the commencement of the issue.
Prospectus
It is the offering document for public issues and includes all relevant particulars, including pricing and the quantity of shares or convertible securities being offered. For a fixed-price issue, the prospectus is registered with the RoC before the issue commences. In a book-built issue, it is registered after the issue of shares concludes.
Abridged prospectus
An abridged prospectus represents a condensed version of the public issue’s offering document.
Shelf prospectus
A shelf prospectus is a prospectus that grants an issuer the ability to conduct a series of issues within one year without the necessity of submitting a fresh prospectus for each issuance.
Important points to note in an IPO prospectus
This section provides an overview of how an offer document is structured to aid readers in navigating its content efficiently.
Cover page
The cover page includes contact information for the issuer company. It also holds the contact information of lead managers as well as its registrars. It outlines the nature, quantity, price, and total value of the offered instruments, along with listing particulars.
Risk factors
In this section, the issuer company’s management highlights internal and external risks while addressing forward-looking statements. Investors are encouraged to review all risk factors before making investment decisions.
Industry and business overview
This segment provides a brief industry summary, an overview of the company’s business, offering details, consolidated financial summaries, and general company information. It also covers merchant bankers, brokers/syndicate members, credit ratings (for debt issues), and underwriting agreements.
Crucial information regarding capital structure, offering objectives, funding plans, schedules, fund usage, and tax benefits is included.
About us
This division of the prospectus offers a comprehensive view of the company, including its business strategy, competitive strengths, industry regulations, corporate history, objectives, subsidiary details, management, corporate governance, and related party transactions.
Financial statements
This presents financial statements and restatements as required, highlighting differences with Indian Accounting Policies, if applicable.
Legal and other information
Here, you will find details on litigations, material developments, government approvals, technical approvals, indebtedness, and more.
Regulatory and statutory disclosures
This component encompasses various regulatory disclosures, including authority for the issue, SEBI-related information, disclaimers, listing, minimum subscription, allotment, consents, expert opinions, fees, past issues, and investor grievance mechanisms.
Offering information
Details on the issue, equity share ranking, dividend payment, face value, issue price, rights of equity shareholders, and bid procedures are included.
Other information
It includes equity share descriptions, Articles of association, material contracts, inspection documents, declarations, definitions, and abbreviations.
Conclusion
A prospectus serves as a comprehensive information source that equips investors with the knowledge necessary for making informed investment decisions.
Making well-informed investment choices is paramount to achieving financial success and minimising risks. Happy Investing!
FAQs
An IPO prospectus is a formal document that provides information about the company’s business, financial condition, and risk factors. It is important for investors to read the prospectus before investing in the IPO, as it helps them evaluate the company’s prospects and potential returns.
No, prospectus and IPO are not the same. A prospectus is a document that contains information about the IPO, while an IPO is the process of offering shares of an unlisted company to the public for the first time. A prospectus is one of the requirements for launching an IPO.
The IPO prospectus is prepared by the company that is going public, in consultation with its lead managers, legal advisors, auditors, and other experts. The prospectus is then filed with the Securities and Exchange Board of India (SEBI) for approval and scrutiny.
The golden rule of a prospectus is that it should contain all the material facts and information that are necessary for investors to make an informed decision. The prospectus should not omit, misstate, or conceal any facts that may affect the value or quality of the securities offered.
The time limit for a prospectus is the period within which the prospectus must be issued to the public after it is registered with the SEBI. According to SEBI regulations, the time limit for a prospectus is 90 days from the date of registration.