Initial Public Offering (IPO)
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, it is called Initial Public Offering or IPO. An IPO paves way for listing and trading of the issuer’s securities.
Pricing of IPO
When a company makes an IPO, the prior requirement would be to decide a price of the Issue / share. The question is -who will decide what should be the price? In India, there is a system of free pricing since 1992. However, there are guidelines that the company (Issuer) will decide the price in consultation with Merchant Banker. Still there is no formula for deciding the price of an IPO. Please note that SEBI does not play any role on pricing of shares, but the company and merchant banker are required to give full disclosures of the parameters which they had considered while deciding the issue price. While deciding the prices, there are two possibilities,
- Where company and Lead Merchant Banker fix a price. This is called Fixed Price.
- Where the company and the Lead Manager (LM) stipulate a floor price or a price band and leave it to market forces to determine the final price. This is called the Price discovery through book building process.
