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IPO क्या है, कैसे काम करता है? - Initial Public Offering Process in Share Market #14 Master Investor - YouTube
Channel: Asset Yogi
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Press the bell icon while subscribing to the channel
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To get the notification of the latest finance videos
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Hello, my name is Mukul
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And you are welcome to one more series of master investors of Asset Yogi
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Friends, out of us, many people wants to invest in IPO
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What is IPO?
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Initial Public Offering
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Whenever a company wants to raise money from the public
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Then it has to register in the list of stock market
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That is called IPO
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Now we want to invest in IPO, but we don't know the whole process of an IPO
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That's why sometimes we are not able to invest
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We have many questions that how do we have to invest in this
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How are the shares are allotted?
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What is a book building issue and what is a fixed price issue?
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What is the role of an investment banker and underwriter?
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So I will try to answer all these questions in this video
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We will understand the whole process of IPO in this video
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Stay tuned with the videos
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If you want to learn stock exchange then you can follow our master investor series
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Which is free
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You will get the link to the playlist in the description
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Other than this, we have a very common query that
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If we want to invest or trade in shares,
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then where do we have to open the Demat account for that
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I would recommend that you should open your account with any discount broker
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Where brokerage charges are minimal
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And delivery charges are zero
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Latest offers, recommendations, and links
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Where to open your Demat account, you will find them in the description below
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Other than this if you have any stock market-related queries
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If you need initial hand holding
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then you can contact us on our WhatsApp number 9292924848
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You can also contact us at our email address, which you will find on the screen
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Now before understanding the process of IPO,
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First, we have to understand that why any company require IPO
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We have to understand the stages of its funding
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I have covered the stages of funding in a video in detail earlier
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How the stock market works, so watch that video for sure
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Here we will cover this in brief
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In Stage 1, any company gets started with promoters fund
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This means the savings of founders, they take money from friends and family members
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In stage 2, when the company grows, then angel investors invest money
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In stage 3, there comes venture capital firm and private equity firm
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Who invests money
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Stage 4 is of the IPO, called Initial Public Offering
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What happens in Initial Public Offering
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Stock exchange means Bombay Stock Exchange or National Stock Exchange
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Company gets listed
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Some investors invest in IPO, we call them investors
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These investors can be of different types
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They can be institutional investors and non-institutional investors
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We will talk about them soon
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Here comes our next question
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Why does IPO is required?
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This is a simple thing if a company wants to raise money or fund
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Then IPO is a very promising way of raising equity funds
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The second way is of raising debt funds
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Now this company raised private equity means until it was not listed
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It has already raised funds from some private investors
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But it has come on that stage where private equity investors
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cannot invest that much money
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Now the help of the public is needed
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Because in public there are more number of investors
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When the number of investors is more,
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then institutional investors can be tapped
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Like mutual funds, pension funds
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They have a huge amount of money
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For tapping big funds, IPO is brought
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And its main reason is that when a company wants to expand
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Then it requires a lot of money
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It may be possible that it has taken debt in the past, it has taken loans
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Or it has some liabilities and it wants to finish them up
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That too can be paid off with funds raised by IPO
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Third is exit to the previous investors
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Like these old investors, angel investors, venture capitals, and PE firms
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Some of them may want to exit
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So when the company gets listed on the stock exchange
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Liquidity gets increased here because the number of investors increases
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Then if they want to exit they can exit
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So we understood why the IPO is required by the company
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What are the reasons
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Now we will understand the process of IPO
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The first step in the process of IPO is that
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any company that wants to bring a public issue
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Hires an investment bank,
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The investment bank is called a merchant bank
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And what are these investment banks anyway?
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For example, we will consider ABC Toys Ltd.
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If this company wants to get listed in some stock exchange
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Let's say it hires an XYZ Capital
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So investment banks can be of what types?
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On today's date all the major banks whether it is ICICI, Axis, SBI, or HDFC
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All these have their investment bank arms
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Which do mergers and acquisitions or bring IPO
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So it is also the job of i-bank, to bring IPO
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Any company that wants to hire an investment bank
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Then what will it see
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Their reputation, how was their track records in raising the funds from IPO
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How is their quality of research?
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How do they do their pricing?
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how do they do their valuation of companies?
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Other than this, how is their distribution
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how many institutional investors do they have tie-up with?
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Or how good they can do the marketing to retail investors
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How good marketing can they do to the noninstitutional investors?
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Other than this, prior relationships
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It may be possible that a company has a prior relationship with investment banks
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That's why any company would want to hire a good investment bank
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The next step is due diligence and filings
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Assume this company has hired an XYZ Capital
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After that, this company will do all the due diligence process and legal process
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What comes under this?
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The first is underwriting,
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Underwriting is the most important step.
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Understand the meaning of underwriting here
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XYZ Capital may say that they can give the whole firm commitment
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What does this firm commitment mean here?
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We are saying that if we raise 1000 crores for you from the market
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Then we are providing a guarantee that if the money falls short in that 1000 crores
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We will invest money from our pockets
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If there is some gain, then it is ours
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So we can say in a way that in underwriting, XYZ Capital is saying to ABC Toys Ltd.
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That we have taken the issue from your side
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Now we have become its sellers
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Now we will sell it in the market at our prices
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The gain is also ours, and the shortfall or the loss is also ours
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After this, the second way is of the best efforts commitment
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Company do best efforts commitment or best efforts agreement
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XYZ Capital will say to ABC Toys that it is our responsibility
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that we will tell you the issue price
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We will do your valuation, will do your pricing
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And we will its distribution
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But it is not our guarantee
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What will be the response, how much will be the subscription
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And the third, that the company
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Assume the whole IPO is very big,
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and it has to raise 10 thousand crores or 15 thousand crores
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It may possible that one investment bank will not handle it
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What will he do then?
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He will make a syndicate, which we call the syndicate underwriting
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They will hire multiple banks or multiple managers
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And allocate some portion to them
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Let's say they will tell Bank A to raise 1000 crores
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You sell 1000 crores IPOs
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By doing this, they may appoint 10 different banks
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And they will take some portion to themselves
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The main book manager or book runner is called the lead manager
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And the rest of them are participant managers in IPO
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And this is called syndicate underwriting
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So underwriting is done
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After that Red Hierring Prospectus is a document
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in which all the details of the company are written
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That what are details of its promoter and business
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What are its competitive advantages?
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What is their capital structure?
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What are their future business plans?
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What are the risks and opportunities from other businesses?
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What is their past financial data?
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How was the growth?
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Management wants to show you the prediction of upcoming growth
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Whatever details the company wants to give about any business
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So that they can maintain the transparency
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Because investor will invest money only when they have all the information of the company
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So all these details come under Red Hierring Prospectus
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And it is the job of XYZ Capital to make this Red Hierring Prospectus
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It is the job of this investment bank
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The third responsibility that comes here is compliance and filings
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This means if there are some guidelines of SEBI or some compliance
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National Stock Exchange or Bombay Stock Exchange, wherever they are listing
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There is a Securities Contract Act
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Or there are Companies Act
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Or whatever regulations or listings regulations specifically
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It is very important to comply with them all
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Listing requirements are quite stringent
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It takes a lot of time
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This job too is handled by an investment bank
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Whoever has this kind of expertise
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The third process is our pricing
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Now, whose responsibility is this?
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This too is the responsibility of XYZ Capital, which means i-bank
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In this, the valuation of the company is put
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For example, let's say XYZ Capital is putting the valuation of ABC Toys
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The total valuation is put to 10 thousand crores.
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Now, we say the total valuation of 10 thousand crores
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Out of this, we want to dilute 20 %
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And what is the meaning of 20 %
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We will raise the fund of 2000 crores out of this
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This means we will sell the 20 % shares
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80% shares will remain with the promoters and existing investors
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20% will go to public
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And what is the value of that 20%?
-2000 crores
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So what will we say?
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How much is the issue size?
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2000 crores is the issue size
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This money will be raised from the public
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So for raising this 2000 crores, we have to issue many numbers of shares
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And we have to allocate price to every share
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Let's say the issue price of one share is 200 Rs
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And the number of shares is 10 crores
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If you multiple 10 crores with 200, then the fund of 2000 crores will be raised
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And see if any investors say I want to invest only 1000 Rs in this IPO
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Then he cannot do this
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A minimum lot size is kept here
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So no one can say that I want to purchase only 2 shares of this company
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Or I want to purchase only 4 shares
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Whatever is the minimum lot size
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Or whatever the company fixes as minimum lot size
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You can invest a minimum of that
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For example, assuming the lot size of 50 shares
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That minimum 50 shares or you can do the bookings in its multiples only
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And can buy these shares
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So 50, 100, 150, you can do bidding in this way only
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So what is the minimum investment here?
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If you multiply 50 shares × 200 Rs
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Then the minimum investment here is 10000 Rs
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There exist two types of issues in pricing
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The first is the fixed price issue, in which XYZ Capitals says that
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We have fixed the issue price as 200 Rs
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Whoever wants to invest,
-invest
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Whoever doesn't want to invest,
-then don't
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If we don't get a good response then we will know that pricing was not good
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But in this case, it may take some extra time
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If the response is not good,
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It may possible that the valuation of the company was not up to the mark
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So more complications may arise
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So nowadays the preferred method is a book building issue
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What happens in book building issue is that
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Price Band is kept
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So this XYZ Capital will say that we are keeping a Price Band of 180 to 200 Rs
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In this, we also see the performance of the market.
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How is the response of the market
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They go to different institutions or go to non-institutional investors
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who can invest a big amount
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So they take responses from them,
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Even retail investors can also bid
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Once all the bids are collected, after that in that price band
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Anything can be assigned as the final price
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So investors have to be ready that whatever will be the final price
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In that, whatever we had bid, whatever amount of shares
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We are ready to purchase that
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And in this price band, the lower amount is called floor price
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And the higher amount is cap price
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And the maximum difference between both of them can be 20%
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I will cover book building issue in more detail in another video
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Once the pricing is done
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The next is our distribution
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How the distribution is done?
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ABC Toys and XYZ Capital will do it together
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What is the meaning of distribution?
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Now we have to market our issue
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We have to sell this issue
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We will sell it to different people
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There are qualified institutional buyers like mutual funds, pension funds
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They manage a lot of money
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So they will approach QIB, they will market there
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Some roadshows will be planned
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Non-institutional investors will be attracted
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Non-institutional investors are your high net worth, individuals
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They invest a quite large amount
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After that, the third category is our retail investors
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So all these three types of investors have to do marketing
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ABC Toys and XYZ Capitals will do it together
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So here comes your distribution network
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Main responsibility is definitely of i-bank
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Once the distribution is done, the application process starts
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The qualified institutional buyers or noninstitutional investors and retail investors
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Whatever interest arose in them
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They think that they are getting a very good valuation
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And they liked the future growth
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Then the application will start
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And it may possible that applications will be more
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Sometimes there is an oversubscription
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Assume there is an issue price only
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and they want to raise 2000 crores and there is the issue of 10 crore shares
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And the applications may come for 20 crores shares
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And it is also possible that there is 5 times subscription
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Recently the IPO came for IRCTC, it was subscribed 110 times
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So in the case where there is so much oversubscription
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Everyone doesn't need to get shares
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So here our next process is allotment of the shares
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What is the meaning of share allotment?
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XYZ Capital, there is a quota of QIB
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If we talk about today then there is a 50% quota of QIB
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In noninstitutional investors, there is approx a 15% quota
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And retail investors have a 35% quota
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According to that these shares are allotted
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But how the allotment is done in the case of oversubscription
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We will discuss this in the next video
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Because it will take time
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I will talk about it in my next video in detail
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Once the shares are allotted, then our final step is listing on the stock exchange
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There is National Stock Exchange and Bombay Stock Exchange
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Wherever the company wants to get listed, it will get listed there
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How much time will this process take?
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We will understand this
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The issue comes and the bid and offer is opened
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Generally, you will see an issue gets opened for 5 days
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Back then, in IRCTC it was opened for 3 or 4 days
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We have seen in the case of Avenue Super Market, it was opened for 3 or 4 days
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On average any issue is open for 3 to 5 days
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All the applications are collected in this
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Nowadays, these applications are also very simplified
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SEBI has allowed the UPI system also in this
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Earlier there were only ASBA applications
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ASBA means Applications Supported by Blocked Amount
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This means an amount in your account was blocked
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And if you are allotted shares in the IPO
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only then the amount will be deducted from your account
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Till then you will get interest on that money
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But now it is very easy with UPI payments
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Earlier you were not able to directly invest through your stockbroker in IPO
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But now you can invest through your stockbroker also
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Assume you have installed the BHIM app, and you have UPI ID
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Then you can directly apply in the IPO through that
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And when there is closing, assume there was open of IPO for 3 or 5 days
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And let's say the closing date was 1 October
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From this closing date, you have to get listed on the stock exchange within 3 days
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For what these 3 days are for?
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The company which is issuing will get funds
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Second, whoever is to be refunded will be refunded
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And to whom, the shares are to be allotted will be allotted
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This process should be finished within 3 days
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Earlier this was allowed for 6 days
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But SEBI has done it for 3 days
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So the process of IPO is getting fast
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If we talk about developed countries, then their listings get done within a day
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So what is the benefit here?
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The issuer company is getting capital very fast
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The sooner the IPO process completes, the sooner they will access the capital
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The second benefit to the investor is that early liquidity
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This means the listings on the stock exchange will be fast
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And if we want to exit, then he can exit
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And the new buyer who wants to purchase this IPO
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Assume he did not get a chance in IPO
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But if he wants to purchase that stock
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Then he can do it fast
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I hope the whole process of IPO is cleared for you
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If you liked the video then like and share the video with your friends and family members
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Tell them about the master investor series
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If you have any suggestions regarding the video and the channel
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Then you can comment it below
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If you haven't subscribed to the channel yet
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Then subscribe and press the bell icon to get the notification of the latest video
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Let's meet in the next informative video
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Till then keep learning, keep earning
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And be happy as always
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