Initial Public Offering (IPO) – UPSC Prelims

Initial Public Offering (IPO):
  • IPO is the selling of securities to the public in the primary market.
  • Primary market deals with new securities being issued for the first time. It is also known as the new issues market.
  • It is different from the secondary market where existing securities are bought and sold. It is also known as the stock market or stock exchange.
  • It 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.
  • Unlisted companies are companies that are not listed on the stock exchange.
  • It is generally used by new and medium-sized firms that are looking for funds to grow and expand their business.
  • Benefits:
    • The funds raised by IPO allows the company to invest in new capital equipment and infrastructure.
    • An IPO paves way for listing and trading of the issuer’s securities on the Stock exchange market.
    • The IPO also allows the company to attract top talent because it can offer stock options to its employees. This enables the company to pay its executives fairly low wages initially. And later, in return, the employees as promised can cash out with the IPO.
Eligibility criteria for companies willing to float an IPO:
  • Tangible assets of at least Rs 3 crore
  • Exhibit average operating profits of Rs 15 crore in the preceding three years with no operating losses in any one of those years.
  • Net worth of Rs 1 crore in each of the three preceding years.
Who is allowed to invest in an IPO?
  • Qualified Institutional Buyers (QIBs) is a category of investors that includes Foreign Portfolio Investors (FPIs)mutual funds, commercial banks, insurance companies, pension funds, etc.
  • QIBs are those institutional investors who are generally perceived to possess expertise and the financial capacities to evaluate and invest in the capital markets.
  • All individuals who invest up to Rs 2 lakh in an issue are classified as retail investors.
  • Retail investors investing above Rs 2 lakh are classified as high net worth individuals.
Offer for Sale:
  • Under the offer for sale method, securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers.
  • In this case, a company sells securities enblock at an agreed price to brokers who, in turn, resell them to the investing public.

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