Initial Public Offer (IPO):

The public issue made by a corporate entity for the first time in its life is called ‘Initial Public
Offer’ (IPO). Securities are issued to successful applicants on the basis of the orders placed
by them, through their brokers. A statement and preliminary prospectus (also known as a red
herring) containing the key information is to be filed with the Registrar of Companies.

Steps involved in IPO

1.​ Order Placement: Investors express their interest in buying shares of the company
by placing orders through their chosen brokerage firms. These orders can be placed
through various channels such as online platforms, phone calls, or in-person visits to
the broker's office.
2.​ Share Allocation: The issuer (the company going public) determines the allocation of
shares based on various factors, including the demand from investors and regulatory
guidelines. The allocation process ensures a fair distribution of shares among
investors.
3.​ Client Application: Investors interested in participating in the IPO submit application
forms to their chosen brokers. These forms include details such as the number of
shares applied for, the bid price, and the investor's demographic information.
4.​ Payment Submission: Investors make payments for the subscribed shares to the
issuer through the broker. This payment is typically made through various modes such
as bank transfers, checks, or electronic fund transfers.
5.​ Primary Issue Account: The issuer opens a separate escrow account known as the
Primary Issue Account. This account is used to hold the funds received from investors
during the IPO subscription period. The funds in this account are temporarily held
until the IPO process is completed.
6.​ Clearing House Process: Once the subscription period is closed, the clearing house
steps in to settle the transactions. It debits the Primary Issue Account of the broker,
reducing the funds held in escrow, and credits the issuer's account with the
corresponding amount. This ensures a smooth transfer of funds from investors to the
issuer.
7.​ Certificate Issuance or Depository Account Crediting: After the funds are settled,
the issuer takes steps to deliver share certificates to investors. Alternatively, in many
modern IPOs, shares are credited to investors' dematerialized (demat) accounts
maintained with a central depository. This electronic form eliminates the need for
physical share certificates and simplifies the process of shareholding.
8.​ Listing on Stock Exchange: Once the funds are received, and share allocation is
finalized, the company's shares are listed on the stock exchange. Investors can then
trade these shares on the open market.

Methods of IPO

1.​ Pure Prospectus

The "Pure Prospectus Method" refers to the process by which an existing corporate enterprise
raises capital funds from the general public through the issuance of a prospectus. This method
involves exclusive subscription, where the company directly offers its securities to the public.
Here are some features and components of the Pure Prospectus Method:

1.​ Exclusive Subscription:

o​ In this method, the company exclusively offers its securities to the general
public for subscription. This means that the general public has the opportunity
to subscribe to the securities issued by the company directly.
2.​ Minimum Public Offering Requirement:
o​ According to SEBI (Securities and Exchange Board of India) norms, a
minimum of 49 percent of the total issue must be offered to the general public.
This requirement ensures a reasonable level of public participation in the
issuance.
3.​ Prospectus:
o​ A prospectus is a comprehensive document that provides detailed information
about the issuing company and the securities being offered. It includes
information about the company's financials, business operations, management,
risk factors, and the terms of the issue. The prospectus serves as a key source
of information for potential investors to make informed decisions.
4.​ Issue Price:
o​ The issue price is the price at which the securities are offered to the public.
The company specifies a stated price at which investors can subscribe to the
securities. This price is often determined based on factors such as the
company's valuation, market conditions, and regulatory guidelines.
5.​ Direct Offer to the General Public:
o​ Under the Pure Prospectus Method, the issuing company directly offers its
securities to the general public. Investors interested in subscribing to the
securities can do so by submitting applications and making payments directly
to the company or through authorized intermediaries.
6.​ Underwriting:
o​ To safeguard the interests of the issuer in the event of an unsatisfactory
response from the public, the company may opt for underwriting.
Underwriting involves a financial institution or underwriter agreeing to
purchase any unsold shares in case the public subscription falls short of the
total issue size. This provides assurance to the company that the entire issue
will be subscribed, and it helps mitigate the risk of undersubscription.

Advantages of Pure Prospectus Method:

●​ Benefits to investors
●​ An excellent mode of disclosure of all the information pertaining to the issue and
facilitates satisfactory compliance with the legal requirements of transparency.
●​ Benefits to issuers
●​ Reduction in the concentration of economic and social power.

Drawbacks of Pure Prospectus Method:

●​ High issue costs

 ●​ Costs as underwriting expenses, brokerage, administrative costs, publicity costs, legal
costs, and other costs are incurred for raising funds hence followed only for large
issues.
●​ Time consuming
●​ It requires the due compliance with various formalities before an issue like
Underwriting, printing of prospectus, etc.

Book Building Meaning

Book building is a process that helps companies discover the price of their security when
their shares are being offered for sale in an IPO with the help of investment bankers. Major
stock exchanges and regulators recommend it because it is the most efficient mechanism to
price securities in the market

Process in Book building

1.​ Hiring Underwriter​

Firstly, the issuing company needs to hire an Investment bank[/wsm-tooltip] that acts as
an underwriter. With the help of issuing company management, the investment bank
identifies the size of the issue and determines the price range of the securities. An investment
bank drafts the company prospectus, including all the relevant details about the issuing
company such as financials, issue size, price range, future growth perspectives, etc. The share
price range consists of floor price (lower end of the price range) and ceiling price (upper end
of the price range).
2.​ Investor’s Bidding​
Investment banks invite investors. Usually, these are high net-worth individuals and fund
managers to submit their bids on the number of shares they are willing to buy at different
prices. Sometimes, not a single investment bank underwrites the entire issue. Rather, the lead
investment bank is engaged with other investment banks who use their networks to tap many
investors for the bidding process.
3.​ Share Pricing​
After the investment bank collects all the bids at different price levels, they evaluate the
aggregate demand for the issue from the submitted bid. To price the share of the issue, the
underwriter uses the weighted-average method to arrive at the final price of the share. This
final price is also known as the ‘cut-off price.’ If investors have a good response for any
issue, the ceiling price is usually a ‘cut-off price.’
4.​ Biding Process Transparency​
Most of the regulators and the stock exchanges[/wsm-tooltip] in the world require companies
to make public the details of the bidding process. An underwriter must publicize the details of
the bids submitted by the investor to purchase the shares of the issue.
5.​ Allotment Settlement​
Lastly, the allotment process begins by allocating the shares of the issue to the accepted
bidders. Now, as you know, initially, investors had bid for this issue at a different price range,
but the settlement process ensures that all allotments happen at the cut-off price of this issue.
An investor who had bid in excess to cut off cost, their excess money is returned, and
investors who had bid less than the cut-off price, investment bank ask them to pay the
difference amount.
Types of book building

Accelerated Book Building

The companies can use an accelerated book-building process to acquire quick capital market.
That can be the case when a company cannot finance its short-term project via debt financing.
So, the issuing company contacts several investment banks that can act as underwriters the
evening before the intended placement. Under this process, the offer period is open only for a
day or two days, and you have no time for marketing for an issue. So, instead, the underwriter
overnight contacts their networks and details the current topic to institutional investors. If this
investor finds this issue interesting, then allotment happens overnight.

Partial Book Building

As the partial book building says, that issue book is built partially, where the investment
banker only invites bids from the selected investors. Based on their bids, they take the
weighted average of the prices to finalize the cut-off price. Then other investors, such as retail
investors, take this cut-off price as a fixed price. So, the bidding happens with a selected
group of investors under the partial book-building process.

Advantages:
1.​ Price Discovery: Book building facilitates the determination of the issue price
through a dynamic process. Investors express their willingness to buy shares at
different price levels, helping underwriters and issuers identify the most suitable price
for the securities. This method enables a more market-driven and responsive pricing
strategy, ensuring that the securities are not overpriced or underpriced.
2.​ Market-Driven Pricing: The process is driven by market forces, reflecting real-time
demand and supply dynamics. The price is not fixed beforehand but evolves based on
investor responses during the book building period. This market-driven approach can
result in a more accurate and fair valuation of the securities, aligning with investor
sentiment.
3.​ Flexibility: Book building allows for adjustments in the issue size and price based on
investor feedback and market conditions. Issuers can adapt the offering to match the
level of demand. This flexibility ensures that the company can optimize its
fundraising by responding to changing market conditions, making the process more
adaptable.
4.​ Institutional Participation: Institutional investors can actively participate in the
book building process, providing a broad and diverse investor base. Their
involvement can enhance the credibility of the offering. Institutions often bring in
substantial capital and long-term investors, contributing to the stability and success of
the offering.
5.​ Efficient Capital Raising: Book building is often considered a more efficient process
compared to traditional methods. It can be faster, allowing companies to raise capital
quickly and respond to market opportunities. The efficiency of the process can be
 advantageous for companies seeking timely capital injections, especially in dynamic
market conditions.
Disadvantages:
1.​ Complexity: The book building process can be intricate, involving multiple parties
such as underwriters, issuers, and investors. It may require a higher level of financial
knowledge and sophistication, potentially excluding some retail investors. The
complexity of the process could limit the participation of certain investors, affecting
the inclusivity of the offering.
2.​ Information Asymmetry: Institutional investors often have access to more
information and resources compared to retail investors. This information asymmetry
can lead to an uneven playing field.Retail investors might be at a disadvantage, as
they may not have the same access to detailed information, potentially impacting their
ability to make informed investment decisions.
3.​ Volatility: The process of determining the issue price based on investor demand can
introduce volatility. Price fluctuations may occur during the book building period.
This volatility can create uncertainty and may affect the perception of the offering,
potentially deterring some investors.
4.​ Manipulation: There is a risk of market manipulation during the book building
process. Participants might attempt to influence the price by placing false orders or
spreading misleading information. Manipulation can distort the true market demand,
leading to suboptimal pricing and potential legal consequences.
5.​ Market Conditions: The success of book building is highly dependent on market
conditions. Unfavorable market conditions, such as economic downturns or high
volatility, can result in lower demand for the offering. External factors beyond the
issuer's control can impact the success of the book building process, making it more
challenging to achieve the desired results.

Offer for Sale Method:

●​ The sale of securities takes place in two stages

●​ First stage, the issuer company sells securities to intermediaries such as the issue
houses and share brokers at an agreed price
●​ Second stage, the securities are resold to ultimate investors at a market-related price
by intermediaries
●​ Difference price constitutes ‘profit’ for the intermediaries
●​ The intermediaries are responsible for meeting various expenses