Initial public offering is the process by which a private company can go public by sale of its

stocks to general public. It could be a new, young company or an old company which decides to
be listed on an exchange and hence goes public.

Companies can raise equity capital with the help of an IPO by issuing new shares to the public
or the existing shareholders can sell their shares to the public without raising any fresh capital.

The Process of Going Public

• Approach an underwriter or investment bank and prepare a prospectus for investors

• The prospectus is a detailed financial document that includes several relevant details about past
performance, risks, opportunities and so forth. Approved by the SEC.

• In the book-building process the investment bank goes on a road-show and approaches several
investors to market the firm and better understand market demand for the firm’s shares

• The underwriter and the firm decide on the size of the offering, which is the number of shares to
be sold to the public at the offering, and the offer-price at which shares are to be allocated to
the IPO investors

• During the book building process investors submit their demand for shares

• IPOs are often over-subscribed. This means that there is more demand than what is being
allocated at the offering

• The investment bank has the discretion to choose how to allocate the limited number of shares
among the many investors that have signed up for the IPO

Book Building is basically a process used in Initial Public Offer (IPO) which helps to determine price and
demand discovery.

It is a process used for marketing a public offer of equity shares of a company. It is a process where,
during the period for which the book for the IPO is open, bids are collected from investors at various
prices, which are above or equal to the floor price.

The offer/issue price is then determined after the last date of IPO based on certain evaluation criteria.

Appointment of Underwriter-
The underwriters is appointed who commit to shoulder the liability and subscribe to the shortfall in
case the issue is under-subscribed. For this commitment they are entitled to a maximum commission
of 2.5 % on the amount underwritten.

• Company nominates lead merchant banker(s)

• Disclose of securities to be issued & price band for bidding

• Appointment of syndicate members

• Bidding process

• Process normally remains for 5 days

• Bids have to be entered within the specified price band

• On the closure of the process, the book runners evaluates the price levels

• At last the book runners & the issuer decides the final price

• Allocation of securities is made to the successful bidders

• Rest get refund orders.

The difference between IPO and FPO can be drawn clearly on the following
grounds:

1. Initial Public Offering is a process through which privately owned

companies can go public by offering their shares for sale to general
public. Follow-On Public Offering refers to a process in which publicly
owned companies can make further issue of shares to the public through
an offer document.
2. IPO is the first public issue of the company’s shares. On the other hand,
FPO is the second or third public issue of the shares of the company.
3. IPO is the offering of shares by an unlisted company. However, when a
listed company makes the offering it is known as Follow-on Public
Offering.
4. IPO is made with an aim of raising capital through public investment.
Unlike FPO, made with an objective of subsequent public investment.
5. IPO are comparatively riskier than FPO. It is because in IPO the
individual investor is not known, of what can happen with the company
in future, while in the case of FPO, the investor already has an idea
about company’s investment and growth prospects.