Primary Markets and IPO

Hello friends, welcome to LearnVern,

My name is Yash,  as we have studied in some of our previous lectures, As to, what is an investment? Why we should invest in ?,


About all of that .


Now, today we will be discussing, basically what is the normal stock market? Whoever comes in the Stocks, who are they? They are different companies, Right?


Why do they come?, because they want money from the public, meaning to raise its fund, so Why do they feel the need to raise money?

As per which process they always come in the market, what are the things they need to see?, What are the different types of investors in the company?

So, we are going to study all of these things.


Ok! So let’s begin,


Our first topic for today is, IPO which is known as Initial Public Offering, this we saw in the previous lecture, while studying about the  types of market, such as Capital Market, Secondary Market,  Debentures Market, Derivative Market, futures and options, Right!

So in that primary market, which is not a new word for us, it is basically a beginning of a new process, now in the language of stock Market, to raise money is to withdraw funds, so a company had different ways to raise money, in that it can also do it from people directly, and their main motive behind this is expansion of the company, meaning it wants to increase its ongoing business, so here it is already profit making but it wants to make it even more profit making.


So, for that the main thing that they need is liquidity, that is money, which is very much important.


So, to bring money first they will go in thd bank, and borrow money from them, meaning to get a normal loan from the bank, so here let’s consider even though the company is making good amount of profit, but still the company has to return the loan, pay EMI s, pay interest, so there is no doubt the company might be in profit, but it can somewhere drag down, due to the expenses, so company might consider not going to the bank, Right!


Next, that can be considered not going  is “Institutions”, that means a group of people where a big individual wants to invest, so the company doesn’t prefer these institutions. Why don't they? Because if any big individual person gets bigger holdings of his company, then it will lead to domination of that third party.

Third, is the IPO, that we are going to discuss, but before that I will tell you about Debentures and Bonds. We had also discussed this earlier, which  means money is lended for a certain period, and in between this period the company pays interest on it.


Now, the remaining is IPO or private placement, meaning equity and that is what we are going to study in today’s lecture,

Normally, what is an I P O ?, It means that the  company passes through this process of an I P O, that is Initial Public Offering, so here you can see the word ‘Public', which makes it clear that the company wants to raise funds from a lot of people and not just one individual, here, not any random company can come in the I P O, they should have at least 3 to 4 years of Balance sheet and the company should be properly established in the market, it can never happen that I made a company and today I want to launch my I P O, so SEBI will never let this happen, it is a non governing body, who regulates the market  always in the interest of investors, so that the investors  money is never lost.


So, I P O is any one company will hire a person, who will take out a good valuation of the company, meaning as to How much net worth value the company is going to become, so no random person can derive this valuation, “the company appoints a merchant banker”, who is a SEBI registered.


So, a merchant banker is one who has a proper knowledge of the companies,  accountancy, how a company runs, knowledge of its entire process, having all such knowledge can only become a merchant banker.

Assume that I as a company appoints a merchant banker, now I will give all my information to merchant banker, and on that basis the banker will create a DRHP, meaning Draft Red Herring Prospectus, if I explain you this in a simple way, if suppose you have to go for an interview for a job, you will have to carry your CV, which will have you’re A to Z bio data as to what are the places that you have worked, your experiences, so everything will be mentioned there.


Same goes with, DRHP it is a bio data of the company, meaning it has information such as who are the promoters of the company, from when the company is established,  company lies under which sector, why is the company raising money?, What are its plan of action with this money?, Who are the Competitors of the company?, So all such Information will be mentioned in DRHP, now from where can we get this DRHP?


You know about SEBI, that it is a non governing body, you will have to provide all the information to SEBI, then we will just simply go on the website of SEBI, and click on this link, so here many things are mentioned which we will cover later also, now to just get the DRHP, we will have to click on the filings, and here we have public issues, as we are talking about raising funds from the public, so here below we have red herring prospectus we will click on this, here we get a long list of different IPO s like go fashion, tarsons, Latent View, 97, Saffire, one 97, so these are their DRHP, so let us open one from them, let’s take Latent View Analytics, so here you can see it is of 349 pages, here each and every details is mentioned, as to Who are the directors of the company, is you are investing with this company what can be the risk factors, what is their business model, they have also provided financial information, each and everything they provide in company’s  DRHP, who are the promoters everything, why they have to mention all the information, because now the company wants investment, and it’s the right of the investors to cross check everything before investing, so in IPO if you are investing any money on any company, you should have all the information of that Company, you shouldn’t  directly invest without having all the informations.


So, lets move ahead, and see the further steps,

This DRHP, then goes to SEBI, and then SEBI verifies it, Why? Because suppose if I form a fraudulent company and then launched an I P o, quoting that it is exiting since 3 to 4 years and filed it, now my intention is to take the money and run away, so there are such possibilities of certain XYZ company having same type of motives, so that is the reason cross verification is important, as it can curb losses, because when we invest our money should be safe, this is the main intention of SEBI.


Now, the company has got the approval for the I P O,

Now, company can launch its IPO whenever they want, I am using the word ‘Whenever '  because any company will think as to what type of market they should go for,  as there are two markets, one is bullish market, and the other is bearish, bullish is one  which provides liquidity and it goes always up and the other is bearish, which trades at new lower prices each day.


So, whoever is a big investor or a company will always want to bring bull in the market. If I want 1000 crores, so I can get people to give me 2000 crores. So the intention of the I P O launcher here, is to have a lot of liquidity in the market.


Now, I P O is normally open for three days, that is first, second and third, now why only three days?

Now, I will tell you How it is open for three days.

Suppose, it is my company I am the owner of 100 percent, and I thought of distributing 25 percent in the public, so when we look just with the perspective of public shares, then it will be considered 100, so out of that 90 percent should be subscribed, that means of there is space for 100 people, then minimum 90 people should come, and these 90 people should come in three days.

Now, it’s not like it should compulsorily come within 3 days, you can also seek permission from SEBI and extend the date to fill up the 90 percent.


Now, assume that my I P O was so good enough, that all of 90 percent got filled up, that means it is completely filled,

Now after this I will have to list my I P O in exchange, within 14 days.

There are two exchanges,

NSE- National Stock Exchange.

BSE – Bombay Stock Exchange.

I will explain about them, when we study the secondary market.


Why should it be listed within 14 days, we will discuss about this now,

Suppose, I needed 1000 crores in I P O, and I got 1500 crores, now I will not give any of my shares and I am keeping the money also, so I am doing a wrong thing because I am doing rollovers here, this is illegal, if I take more than 14 days, then SEBI will incur penalty on me.

So, this is the process of I P O, following which the company comes in the market.


Here, we saw that there should be 90 percent subscription, now inside this subscription what are the types of investors that come in, we will discuss this now.


So, first here it is written Qualified Institutional Buyers, and besides that it is mentioned 50 percent reservations.

That 25 percent, for the public it was 100. That means from this 100, we will have to give 50 percent to the qualified institutions, meaning those who are big boy players, that is FII, foreign Institutional Investors, DII, Domestic Institutional Investors, having high capital mutual funds, those who put in a high amount of investment. They have to bid more than 10 crores always in I P O.


Next is HNI clients, that is High Net Investors,  those who have to do more than 2 lakh of bidding


Lastly, comes the retail investors, like us, for whom a 35 percent reserved quota is given.

Now, we will see How is the allotment of I P O done to them?


 Meaning, for the Qualified, 50 percent of investment is given, so here if it has space for only 50 people, but there are 100 people who have applied, so they will give opportunity to all of them, by dividing according to the pro data, and given half and half equal shares.


Second HNI will come , if there is space for 15 but 30 people came in, so accordingly by the prodata they will surely get half and half here also.


Now, the remaining are the Retail Investors, that is you and me, for us there is a lottery system, where it is based upon destiny if you will get or not. As retail investors, we have to buy at least a minimum lot of 1 that is of 15000, if the price for a share is 100, then I will have to take at least 150 shares mandatory. You cannot buy anything less, minimum 150 shares should be purchased and maximum you can go up to 2 lakhs.

You cannot go more than 2 lakh.

So, these are the three types of investors inside the market.




I hope you understood till here.




Now, we will discuss the pricing methods of IPO, how it is formed?


According to the valuation there are two types of Price method in IPO,


Now, is Fixed Price Method, where the company decides to suppose 100 rupees for its IPO and that will be fixed, both minimum and maximum you will have to purchase it for 100.

Second, is Book Building Method, in this they provide a range, Assume from 100 up till 105, from this you can bid at any of the price, depending how much investors are bidding.


As retail Investors, or HNI or QI, what we will do is that we will always prefer to make higher bids, Why? Because, suppose many people bid at the average price of 103, and I bid at 100, so my possibilities of getting one becomes zero.

Because the company now decides the average price for shares as 103, how much I am giving only 100, so I am automatically out from the list.

So, our preferences should be that we should bid at the maximum prices.

Because even if it is decided at 103, then only you can get, your chances to get will be formed, because you are ready to give 105, and they will decide from 103.

So, these were the two methods of IPO pricing.




If you have any doubts or queries,then you can post that in the comment section, and in this way your questions will reach us, and your comment will reach the other learners, the result of which, it will help in creating discussion of queries and solutions.

So, don't forget to post your comment in the discussion box








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