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Initial Public Offering (IPO)

  • 16 Feb 2022
  • 4 min read

Why in News?

Recently, the government-owned Life Insurance Corporation of India (LIC) filed its Draft Red Herring Prospectus (DRHP) for its mega Initial Public Offering (IPO) with the Securities and Exchange Board of India (SEBI).

  • The Government, which owns 100% of LIC, will be offloading 5% of its stake through the IPO. All the proceeds from the IPO, which is in the form of an offer for sale and is expected to total up to at least Rs. 60,000 crore, will go towards meeting the Government’s disinvestment target for FY22.
  • LIC is fully owned by the government. It was set up in 1956. It has the biggest share in India’s insurance business.

What is an IPO?

  • It is the process by which a privately held company, or a company owned by the government such as LIC, raises funds by offering shares to the public or to new investors.
    • Following the IPO, the company is listed on the stock exchange. Stock exchange is an organized market for the sale and purchase of securities such as shares, stocks, and bonds.
    • A listed company can raise share capital for growth and expansion in the future through a follow-on public offering or FPO.
  • While coming up with an IPO, the company has to file its offer document with the market regulator Securities and Exchange Board of India (SEBI).
    • The offer document contains all relevant information about the company, its promoters, its projects, financial details, the object of raising the money, terms of the issue, etc.
    • SEBI is a statutory body established in 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.

What is an Offer for Sale?

  • Under the offer for sale method, securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers.
  • In this case, a company sells securities enbloc at an agreed price to brokers who, in turn, resell them to the investing public.

What is DRHP?

  • A Draft Red Herring Prospectus (DRHP) is a legal preliminary document. It serves as an important communication link between the IPO-bound company and its investors and stakeholders.

Who is allowed to invest in an IPO?

  • Qualified Institutional Buyers (QIBs) is a category of investors that includes Foreign Portfolio Investors (FPIs), mutual funds, commercial banks, insurance companies, pension funds, etc.
    • QIBs are those institutional investors who are generally perceived to possess expertise and the financial capacities to evaluate and invest in the capital markets.
  • All individuals who invest up to Rs 2 lakh in an issue are classified as retail investors.
  • Retail investors investing above Rs 2 lakh are classified as high net worth individuals.

Which companies can come out with an IPO?

  • In order to protect investors, SEBI has laid down rules that require companies to meet certain criteria before they can go to the public to raise funds.
  • Among other conditions, the company must have net tangible assets of at least Rs 3 crore, and net worth of Rs 1 crore in each of the preceding three full years, and it must have a minimum average pre-tax profit of Rs 15 crore in at least three of the immediately preceding five years.

Source: IE

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