In 1602, the Dutch East India Company was the first company to issue stocks and bonds in

the world in an initial public offering.

In August 2010 the world’s largest ever IPO was completed by the Agricultural Bank of
China.

[edit] Reasons for listing

When a company lists its shares on a public exchange, it will almost invariably look to issue
additional new shares in order at the same time. The money paid by investors for the newly-
issued shares goes directly to the company (in contrast to a later trade of shares on the
exchange, where the money passes between investors). An IPO, therefore, allows a company
to tap a wide pool of stock market investors to provide it with large volumes of capital for
future growth. The company is never required to repay the capital, but instead the new
shareholders have a right to future profits distributed by the company and the right to a
capital distribution in case of dissolution.

The existing shareholders will see their shareholdings diluted as a proportion of the
company's shares. However, they hope that the capital investment will make their
shareholdings more valuable in absolute terms.

In addition, once a company is listed, it will be able to issue further shares via a rights issue,
thereby again providing itself with capital for expansion without incurring any debt. This
regular ability to raise large amounts of capital from the general market, rather than having to
seek and negotiate with individual investors, is a key incentive for many companies seeking
to list.

There are several benefits to being a public company, namely:

 Bolstering and diversifying equity base

 Enabling cheaper access to capital
 Exposure and prestige
 Attracting and retaining the best management and employees
 Facilitating acquisitions
 Creating multiple financing opportunities: equity, convertible debt, cheaper bank
loans, etc.
 Increased liquidity for equity holder
[edit] Procedure
IPOs generally involve one or more investment banks known as "underwriters". The
company offering its shares, called the "issuer", enters a contract with a lead underwriter to
sell its shares to the public. The underwriter then approaches investors with offers to sell
these shares.

The sale (allocation and pricing) of shares in an IPO may take several forms. Common
methods include:

 Best efforts contract

 Firm commitment contract
 All-or-none contract
 Bought deal
 Dutch auction
 Self distribution of stock

A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more
major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a
commission based on a percentage of the value of the shares sold (called the gross spread).
Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO,
take the highest commissions—up to 8% in some cases.

Multinational IPOs may have as many as three syndicates to deal with differing legal
requirements in both the issuer's domestic market and other regions. For example, an issuer
based in the E.U. may be represented by the main selling syndicate in its domestic market,
Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia.
Usually, the lead underwriter in the main selling group is also the lead bank in the other
selling groups.

Because of the wide array of legal requirements, IPOs typically involve one or more law
firms with major practices in securities law, such as the Magic Circle firms of London and
the white shoe firms of New York City.

Usually, the offering will include the issuance of new shares, intended to raise new capital, as
well the secondary sale of existing shares. However, certain regulatory restrictions and
restrictions imposed by the lead underwriter are often placed on the sale of existing shares.

Public offerings are primarily sold to institutional investors, but some shares are also
allocated to the underwriters' retail investors. A broker selling shares of a public offering to
his clients is paid through a sales credit instead of a commission. The client pays no
commission to purchase the shares of a public offering; the purchase price simply includes
the built-in sales credit.
The issuer usually allows the underwriters an option to increase the size of the offering by up
to 15% under certain circumstance known as the green shoe or overallotment option

[edit] Auction
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be challenged and removed. (December 2006)

A venture capitalist named Bill Hambrecht has attempted to devise a method that can reduce
the inefficient process. He devised a way to issue shares through a Dutch auction as an
attempt to minimize the extreme under pricing that underwriters were nurturing.
Underwriters, however, have not taken to this strategy very well which is understandable
given that auctions are threatening large fees otherwise payable. Though not the first
company to use Dutch auction, Google is one established company that went public through
the use of auction. Google's share price rose 17% in its first day of trading despite the auction
method. Brokers close to the IPO report that the underwriters actively discouraged
institutional investors from buying to reduce demand and send the initial price down. The
resulting low share price was then used to "illustrate" that auctions generally don't work.
Perception of IPOs can be controversial. For those who view a successful IPO to be one that
raises as much money as possible, the IPO was a total failure. For those who view a
successful IPO from the kind of investors that eventually gained from the under pricing, the
IPO was a complete success. It's important to note that different sets of investors bid in
auctions versus the open market—more institutions bid, fewer private individuals bid. Google
may be a special case, however, as many individual investors bought the stock based on long-
term valuation shortly after it launched its IPO, driving it beyond institutional valuation.

[edit] Pricing
The under pricing of initial public offerings (IPO) has been well documented in different
markets (Ibbotson, 1975; Ritter 1984; Levis, 1990; McGuiness, 1992; Ducker and Pure,
2007). While issuers always try to maximize their issue proceeds, the under pricing of IPOs
has constituted a serious anomaly in the literature of financial economics. Many financial
economists have developed different models to explain the under pricing of IPOs. Some of
the models explained it as a consequences of deliberate under pricing by issuers or their
agents. In general, smaller issues are observed to be underpriced more than large issues
(Ritter, 1984, Ritter, 1991, Levis, 1990)

Historically, some of IPOs both globally and in the United States have been underpriced. The
effect of "initial under pricing" an IPO is to generate additional interest in the stock when it
first becomes publicly traded. Through flipping, this can lead to significant gains for
investors who have been allocated shares of the IPO at the offering price. However, under
pricing an IPO results in "money left on the table"—lost capital that could have been raised
for the company had the stock been offered at a higher price. One great example of all these
factors at play was seen with [Link] IPO which helped fuel the IPO mania of the late
90's internet era. Underwritten by Bear Stearns on November 13, 1998, the stock had been
priced at $9 per share, and famously jumped 1000% at the opening of trading all the way up
to $97, before deflating and closing at $63 after large sell offs from institutions flipping the
stock. Although the company did raise about $30 million from the offering it is estimated that
with the level of demand for the offering and the volume of trading that took place the
company might have left upwards of $200 million on the table.

The danger of overpricing is also an important consideration. If a stock is offered to the

public at a higher price than the market will pay, the underwriters may have trouble meeting
their commitments to sell shares. Even if they sell all of the issued shares, if the stock falls in
value on the first day of trading, it may lose its marketability and hence even more of its
value.

Underwriters, therefore, take many factors into consideration when pricing an IPO, and
attempt to reach an offering price that is low enough to stimulate interest in the stock, but
high enough to raise an adequate amount of capital for the company. The process of
determining an optimal price usually involves the underwriters ("syndicate") arranging share
purchase commitments from leading institutional investors.

On the other hand, some researchers (e.g. Geoffrey C., and C. Swift, 2009) believe that IPOs
are not being under-priced deliberately by issuers and/or underwriters, but the price-rocketing
phenomena on issuance days are due to investors' over-reaction.[2]

[edit] Issue price

A company that is planning an IPO appoints lead managers to help it decide on an
appropriate price at which the shares should be issued. There are two ways in which the price
of an IPO can be determined: either the company, with the help of its lead managers, fixes a
price or the price is arrived at through the process of book building.

Note: Not all IPOs are eligible for delivery settlement through the DTC system, which would
then either require the physical delivery of the stock certificates to the clearing agent bank's
custodian, or a delivery versus payment (DVP) arrangement with the selling group brokerage
firm..

[edit] Quiet period

Main article: Quiet period

There are two time windows commonly referred to as "quiet periods" during an IPO's history.
The first and the one linked above is the period of time following the filing of the company's
S-1 but before SEC staff declare the registration statement effective. During this time, issuers,
company insiders, analysts, and other parties are legally restricted in their ability to discuss or
promote the upcoming IPO.[3]

The other "quiet period" refers to a period of 40 calendar days following an IPO's first day of
public trading. During this time, insiders and any underwriters involved in the IPO are
restricted from issuing any earnings forecasts or research reports for the company. Regulatory
changes enacted by the SEC as part of the Global Settlement enlarged the "quiet period" from
25 days to 40 days on July 9, 2002. When the quiet period is over, generally the underwriters
will initiate research coverage on the firm. Additionally, the NASD and NYSE have
approved a rule mandating a 10-day quiet period after a Secondary Offering and a 15-day
quiet period both before and after expiration of a "lock-up agreement" for a securities
offering.

[edit] Stag profit

Stag profit is a stock market term used to describe a situation before and immediately after a
company's Initial public offering (or any new issue of shares). A stag is a party or individual
who subscribes to the new issue expecting the price of the stock to rise immediately upon the
start of trading. Thus, stag profit is the financial gain accumulated by the party or individual
resulting from the value of the shares rising.

For example, one might expect a certain I.T. company to do particularly well and purchase a
large volume of their stock or shares before flotation on the stock market. Once the price of
the shares has risen to a satisfactory level the person will choose to sell their shares and make
a stag profit.

Largest IPOs
 General Motors $23.1B in 2010
 Agricultural Bank of China $22.1B in 2010
 Industrial and Commercial Bank of China $21.9B in 2006
 American International Assurance $20.5B in 2010
 NTT Do Como $18.4B in 1998
 Visa Inc. $17.9B in 2008
 AT&T Wireless $10.6B in 2000
 Resent $10.4B in 2006
 Santander Brazil $8.9B in 2009

Corporates may raise capital in the primary market by way of an initial public offer, rights issue or
private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary
market. This Initial Public Offering can be made through the fixed price method, book building method
or a combination of both.

There are two types of Public Issues:

ISSUE OFFER DEMAND PAYMENT RESERVATIONS

TYPE PRICE
Fixed Price Price at which Demand for the 100 % advance 50 % of the shares
Issues the securities securities payment is offered are reserved for
are offered offered is required to be applications below Rs.
and would be known only made by the 1 lakh and the balance
allotted is after the investors at the for higher amount
made known closure of the time of applications.
in advance to issue application.
the investors
Book A 20 % price Demand for the 10 % advance 50 % of shares offered
Building band is securities payment is are reserved for QIBS,
Issues offered by the offered, and at required to be 35 % for small investors
issuer within various prices, made by the and the balance for all
whom is available on QIBs along with other investors.
investors are a real time the application,
allowed to bid basis on the while other
and the final BSE website categories of
price is during the investors have
determined by bidding period.. to pay 100 %
the issuer only advance along
 after closure with the
of the bidding. application.

More About Book Building

Book Building is essentially a process used by companies raising capital through Public Offerings-
both Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) to aid price and demand
discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids
are collected from investors at various prices, which are within the price band specified by the issuer.
The process is directed towards both the institutional as well as the retail investors. The issue price is
determined after the bid closure based on the demand generated in the process.

The Process:

 The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'.
 The Issuer specifies the number of securities to be issued and the price band for the bids.
 The Issuer also appoints syndicate members with whom orders are to be placed by the
investors.
 The syndicate members input the orders into an 'electronic book'. This process is called
'bidding' and is similar to open auction.
 The book normally remains open for a period of 5 days.
 Bids have to be entered within the specified price band.
 Bids can be revised by the bidders before the book closes.
 On the close of the book building period, the book runners evaluate the bids on the basis of
the demand at various price levels.
 The book runners and the Issuer decide the final price at which the securities shall be issued.
 Generally, the number of shares are fixed, the issue size gets frozen based on the final price
per share.
 Allocation of securities is made to the successful bidders. The rest get refund orders.

Guidelines for Book Building

Rules governing Book building are covered in Chapter XI of the Securities and Exchange Board of
India (Disclosure and Investor Protection) Guidelines 2000.

BSE's Book Building System

 BSE offers a book building platform through the Book Building software that runs on the BSE
Private network.
 This system is one of the largest electronic book building networks in the world, spanning
over 350 Indian cities through over 7000 Trader Work Stations via leased lines, VSATs and
Campus LANS.
 The software is operated by book-runners of the issue and by the syndicate members , for
electronically placing the bids on line real-time for the entire bidding period.
 In order to provide transparency, the system provides visual graphs displaying price v/s
quantity on the BSE website as well as all BSE terminals.