INTRODUCTION...................................................................................................

4
A. VENTURE CAPITAL........................................................................................5
1. What is venture capital?..................................................................................5
1.1. Definition.....................................................................................................5
1.2. History of venture capital............................................................................5
1.3. Characteristics of venture capital................................................................5
1.4. Stages of venture capital financing..............................................................6
2. Pros and cons of Venture Capital....................................................................7
2.1. Advantages of Venture Capital.....................................................................7
2.2. Disadvantages of Venture Capital...............................................................8
3. Choosing a venture capitalist..........................................................................9
4. Methods of venture capital financing and choosing capitalist...................11
B. Venture capital IPO..........................................................................................13
1. What is IPO?...................................................................................................13
1.1. Definition...................................................................................................13
1.2. Why goes public?.......................................................................................13
2. About IPO - Primary & Secondary Market................................................13
3. Types of IPO....................................................................................................14
4. Advantages and disadvantages of IPO.........................................................16
4.1. Advantages of IPO.....................................................................................16
4.2. Disadvantages of IPO................................................................................17
5. IPO launching process...................................................................................18
6. Underwriters...................................................................................................20
6.1. What Is an Underwriter?...........................................................................20
6.2. Underwriters in an IPO process................................................................20
6.2.1. Roles of IPO Underwriters.....................................................................20
 6.2.2. Responsibilities of IPO Underwriters.....................................................20
7. Underwriting...................................................................................................21
7.1. What is underwriting?...............................................................................21
7.2. Why is underwriting needed?....................................................................21
7.3. Types of underwriting................................................................................21
7.4. The IPO underwriting process...................................................................23
8. Underpricing...................................................................................................25
8.1. What Is Underpricing?..............................................................................25
8.2. Why does underpricing exist......................................................................25
9. The cost of issuing securities.........................................................................26
CONCLUSION......................................................................................................28
REFERENCES......................................................................................................29
 INTRODUCTION

Every great company starts with a great idea, but even the best ideas can not go
far without money. It takes abundant financing for a startup to get from vision to
execution, and for many entrepreneurs, venture capital provides critical financial
support in the initial stages of growth. During the process of calling the fund, IPO
plays a very important role - allows a company to raise equity capital from public
investors. 
Our presentation is the research about venture capital and IPO, and their
importance in the activity of the financial market.
A. VENTURE CAPITAL  
1. What is venture capital?
1.1. Definition:
Venture capital is a form of private equity and a type of financing that investors
provide to start-up companies and small businesses that are believed to have long-
term growth potential.
Sources of funds: Venture capital generally comes from individuals, pension
plans, private foundations, well-known investors, investment banks, insurance
companies, and any other financial institutions. 
1.2. History of venture capital:
Venture capital is a subset of private equity. While the roots of private equity can
be traced back to the 19th century, venture capital only developed as an industry
after the Second World War. Harvard Business School professor Georges Doriot is
generally considered the “Father of Venture Capital”. He started the American
Research and Development Corporation in 1946 and raised a $3.58 million fund to
invest in companies that commercialized technologies developed during World
War II. The corporation’s first investment was in a company that had ambition to
use x-ray technology for cancer treatment. The $200,000 that Doriot invested
turned into $1.8 million when the company went public in 1955.
1.3. Characteristics of venture capital:
Illiquidity: Venture capital is usually long-term investment and fairly illiquid
compared to market-trade instruments, venture capital investments do not offer the
option of a short-term payout.
Long-term investment horizon: Venture capital investments feature a structural
time lag between the initial investment and the final payout and usually have a
time horizon of 10 years. The structural time lag increases the liquidity risk.
Therefore, venture capital investments tend to offer very high returns to
compensate for this higher-than-normal liquidity risk.
Entrepreneurs lack full information of the market: The majority of venture
capital investing is into innovative projects whose aim is to disrupt the market.
Such projects offer potentially very high returns but also come with very high
risks. As such, entrepreneurs and venture capital investors often work in the dark
because no one else has done what they are trying to do.
Mismatch between entrepreneurs and venture capital investors: An entrepreneur
and an investor may have very different objectives regarding a project. The
entrepreneur may be concerned with the process where the investor may only be
concerned with the returns. 
1.4. Stages of venture capital financing:
Stage 1: Pre-seed capital:
The first stage of pre-seed capital is commonly referred to as pre-seed capital.
It’s aptly named because it provides the initial funding necessary to launch a
business and get it off the ground. Small amounts of money raised in pre-seed
funding stage are used for market research and prototyping. Using the fund to
expand the team or do market research is also possible.
Stage 2: Startup capital:
After the pre-seed stage, startup companies receive funding from venture
capitalists in what is known as the “startup capital” stage. After researching the
industry and developing the business strategy, businesses can start promoting and
selling their products. In this stage, most businesses will have a working prototype
of their products ready for consumers to try. The capital might be redirected to hire
more executives, elevate the product/service, or undertake more studies.
Stage 3: Early stage (Second stage capital):
 Though it sounds contradictory, this stage usually occurs after the pre-seed and
startup stages. This is because money from this stage is commonly used for
manufacturing, production facilities, sales, and increased marketing. The sum of
money invested here may be worthwhile than in previous stages. As the firm
continues to promote its goods and marketing, it may soon begin to turn a profit. 
Stage 4: Expansion stage (Third stage capital):
At the fourth stage of venture capital, the real progress begins. With a strong
foundation now set, additional funding can be put towards developing new
products, growing into other markets, and maybe even purchasing competing
startups. The companies must have a solid customer base and proven track record
before securing stage 4 and ensuing funding. On top of that, they also need the
following: Consistent income; A history of expansion; Plans for international
growth. 
Stage 5: Later stage - Mezzanine/Bridge:
The last phase of venture capital involves drifting toward a liquidity event, for
example, an IPO or an acquisition. When a company reaches the mezzanine level,
also known as the bridge level or the pre-public stage, it has matured to the point
where it can compete successfully in the market.
2. Pros and cons of Venture Capital
2.1. Advantages of Venture Capital:
Opportunity for Expansion of the Company:

Venture Capital provides the company with an opportunity to expand. This would
not have been possible through other methods like bank loans. Bank loans require
collateral, and there is an obligation to repay the loan.  However, in venture capital,
the investors themselves are ready to take the risk as they believe in the company’s
long-term success. Therefore, venture capital financing is beneficial for start-ups
with high initial costs and limited operating history.

Valuable Guidance and Expertise:

Besides capital financing, venture capital is also a source of valuable guidance,
expertise, and consultation. A member from the venture capital firm is usually
appointed to the board of the start-up company. This allows the active involvement
of the venture capitalist in the company’s decisions. As venture capitalists have
experience building and expanding start-ups, their expertise, and guidance can
prove beneficial. They can help with building strategies, technical assistance,
resources, etc., to make a business successful.
Helpful in building networks and connections:
Venture capitalists have a huge network of connections in the business community.
These connections could be advantageous for start-ups to grow and become
successful. They can help the start-up enter into alliances with potential customers
or business houses.
No obligation for repayment:
There is no obligation to repay the venture capitalist investors if the start-up fails
or shuts down. Hence, venture funding is essential for start-ups. It does not leave
the start-up with the burden to pay back, as is the case with bank loans.
Venture Capitalists are trustworthy:
VCs are strictly regulated by regulatory bodies. For instance, In the USA, VCs are
regulated by the U.S. Securities and Exchange Commission (SEC). They are
subject to similar regulations as any other form of private securities investment.
Also, know-your-customer (KYC) and anti-money laundering regulations may
apply since a large number of venture capital funds are provided by depository
institutions and banks. It’s a rarity to see a VC perform an unscrupulous activity.
2.2. Disadvantages of Venture Capital:
Dilution of Ownership and Control:
Venture capitalists provide huge capital to start-ups in return for a stake in the
equity of the company. If the start-up succeeds, then it helps them earn tremendous
amounts of profit. VCs usually become a part of the Board. They actively
participate in the company’s decision-making. VCs will want to protect their
investments. If there is a difference of opinion between the VC and the start-up
founder, then things can get chaotic. Any major decision requires the consent of
investors.
Long and Complicated Process:
The start-up company’s owner should first present a detailed business plan. After
that, the VC analyzes the business plan in detail. Then, a one-on-one meeting is
conducted to discuss the business plan in detail. Venture Capital funding involves a
huge amount of risk. So, VCs usually take lots of time to decide whether they want
to undertake investment or not. Later, if the VC agrees to go ahead with the
funding, then due diligence is done to verify the details. If the due diligence is
found satisfactory, then only the VC will offer a term sheet. Therefore, venture
capital funding is often found to be a lengthy process.
May release the funds from time to time:
Because venture funding involves a huge amount of capital, the VC may not
release all the funds at the same time. Most of the contracts require the start-up
company to reach certain milestones to receive the funding which they originally
requested. This creates undue pressure on the start-up company.
This may lead to under-valuation:
Venture Capitalists are in a hurry to sell off their equity stake. Therefore, they may
pressure the company owner to list the company. This untimely listing of the
company could result in the undervaluation of the company’s shares. This could
prove to be a disadvantage for the company’s owner.
3. Choosing a venture capitalist
Firstly, financially stable, or strong venture capitalists - somebody who might be
helpful at a later stage of your company’s life. The venture capitalist needs to have
the resources and financial reserves for additional financing stages should they
become necessary. This doesn’t mean that bigger is necessarily better because of
our next consideration.
Secondly, because the venture capitalist may be heavily involved in your start-up
company's business, you want to be looking for somebody whose management
style is compatible with your own. Some venture capitalists will wish to be very
much involved in day to day operations and decision making, whereas others will
be content with monthly reports. While type is better depends on the firm and also
on the venture capitalists’ business skills. In addition, a large venture capital firm
may be less flexible and more bureaucratic than a smaller "boutique" firm.
Thirdly, it's good to obtain and check references, you wanna know that venture
capitalist has been successful in the past with similar startup companies. Has the
venture capitalist been successful with similar firms? Of equal importance, how
has the venture capitalist dealt with situations that didn’t work out?
Number four, it's important if it's very valuable if a venture capitalist has good
connections, it can help you find important customers or important suppliers. So in
other words if he is well-connected and can help you with new contacts. Venture
Capitalist firms frequently specialize in a few particular industries, and such
specialization could prove quite valuable. A venture capitalist may be able to help
the business in ways other than helping with financing and management by
providing introductions to potentially important customers, suppliers, and other
industry contacts. Venture capitalist firms frequently specialize in a few industries,
and such specialization could prove quite valuable.
Finally, the bullet point says what is the exit strategy. Venture Capitalists are
generally not long-term investors. This means when the time comes to think of the
Venture Capitalists for all the financial help he has provided in saying goodbye,
how will that all happen? How would the Venture Capitalists cash out of the
business when the time comes? Would he get some percentage of the company’s
value or become one of the stockholders? What is going to happen that’s up to the
negotiation between the startup, partner, and Venture Capitalists. How and under
what circumstances the venture capitalist will “cash out” of the business should be
carefully evaluated.
4. Methods of venture capital financing and choosing capitalist
- Equity financing: When a company requires money to finance the startup which
has huge capital requirements with a robust business plan and has a potential to
grow into a highly profitable venture, the company makes use of equity financing.
Companies offer a percentage of business or the company to the investors, in
exchange for the capital when the company or firm is not able to give timely
returns 
- Conditional loans: Conditional loans have neither predetermined repayment
schedule nor any fixed interest rate on the borrowed capital, an entrepreneur needs
to pay the lender in the form of royalty when the company is able to generate the
revenue or profit, no interest is payable to the lender for the loan amount. The
royalty rate varies between 2% and 15% on the basis of revenue, profit percentage,
cash flow of the venture, etc. An entrepreneur also needs not to pay interest or
principal instantly.
- Conventional loans: Unlike conditional loans, where the entrepreneurs need not
to pay any interest to the lender, in the case of conventional loans an entrepreneur
must pay interest initially but with a low-interest rate on the borrowed capital. The
interest rate will increase as per increase in profit. Along with the interest on the
borrowed capital, an entrepreneur needs to pay the royalty in accordance with the
sales/profit.
- Income notes: This is the combination of traditional loans from banks or non-
bank companies and conditional loans. Here are the key features of income note:
 +Entrepreneurs need to repay the principal amount along with the interest
within the predetermined stipulated period.
+ Entrepreneurs need to pay a royalty on sales or profit.
- Debentures: The start-up companies raise funds by issuing debentures with a
guarantee to repay the amount of invested money when the security is matured.
The interest on debentures is payable at three various rates in accordance with the
phase of operation or business:
+ Before the commencement of operation - No interest
+ Commencement of operation - Low rate of interest
+ After reaching a particular level of sales or profit - A high rate of interest.
There are two types of debentures: Convertible debenture and non-convertible
debenture. While convertible debentures can be converted the debt to the equity
shares, the non-convertible debentures cannot.
B. Venture capital IPO
1. What is IPO?
1.1. Definition: 
Initial Public Offering, or IPO, is a unique process to convert a private company
into a public company by issuing shares. The issuance of shares for the public
allows the company to gather capital and an excellent opportunity for the public to
invest and earn returns on that investment.
Initially, a private company grows with its initial investors, founders, and
stakeholders. When a company has achieved a specific goal where the
management realizes that they are stable enough to handle the SEC (Securities And
Exchange Commission) regulations, grow and diversify using the general public's
money, the company decides to offer an Initial Public Offering. Through this, the
stakeholder ship in the company is offered to the public through shares.
1.2. Why goes public? 
Being publicly traded also opens many financial doors:

- Because of the increased scrutiny, public companies can usually get better rates
when they issue debt.

- As long as there is market demand, a public company can always issue more
stock. Thus, mergers and acquisitions are easier to do because stock can be issued
as part of the deal.

- Trading in the open markets means liquidity. This makes it possible to implement
things like employee stock ownership plans, which help to attract top talent.

2. About IPO - Primary & Secondary Market

Primary Market is where the company sells fresh stocks like an IPO. This is the
first instance where the investors contribute to the company, and the company's
equity capital is made by funds accumulated by selling stocks in the primary
market. Private placement and preferential allotment are two other ways in which
stocks can be sold in the primary market after an IPO.
  In private placement, the company can offer stock to significant investors like
banks, hedge funds. This could be done without making the shares available for
the public.
  In preferential allotment, the company can sell shares to select investors at a
price which is not available in the market.
Secondary Market is commonly known as a stock exchange, including the New
York Stock Exchange (NYSE), Nasdaq, and all major exchanges around the world.
This is where the stocks that have been allocated in the primary market are resold
and purchased further by new people. A secondary market is where the investors
trade among themselves.
-> The difference between Primary market and Secondary market: 

3. Types of IPO
Generally, there are two types of IPOs. A company gets a boost when people
start buying their equities. The two basic types of IPOs are:
Fixed Price Issue
 In a Fixed Price Issue, the price of the offerings are evaluated by the company
along with their underwriters. They evaluate the company's assets, liabilities, and
every financial aspect. They then work on these figures and fix a price for their
offerings. The price is fixed after considering all the qualitative and quantitative
factors. In a fixed price issue, the fixed price may be undervalued during the
company’s IPO. The price is mostly lower than the market value. As a result,
investors are always very interested in fixed price issue and ultimately revalue the
company positively.
Book Building Issue
A book building issue is a comparatively new concept in India compared to other
parts of the world. In a book building issue, there is no fixed price, but a price band
or range. The lowest and the highest price is called ‘floor price’ and ‘cap price’
respectively. You can bid for the shares with the desired price you would like to
pay. Thereafter the price of the stock is fixed after evaluating the bids. The demand
of the share is known after each day as the book is built.
An IPO can be done through Fixed Price Issue or Book Building Issue or a
combination of both.
Differences between Fixed Price issue and Book Building issue:
- Price: The price of the share is fixed on the first day of the listing in fixed price
issue and is printed in an order document whereas, in book building issue only the
price band is fixed initially, the exact price is not fixed. Only after the closing date
of bid, the exact share price is fixed.
- Demand: The demand in a fixed price issue is known only after the closing of the
issue whereas, in a book building issue, the demand for the share is known after
each day.
- Payment: In a fixed price issue, you need to pay 100% of the price of the share at
the time of bidding for the share, but in case of book building issue, the payment
can be completed after the allocation.

Type of Fixed Price issue Book Building issue

IPO

Price The price of the share is fixed Only the price band is fixed
on the first day of the listing in initially, the exact price is not
fixed price issue and is printed fixed. Only after the closing date
in an order document  of bid, the exact share price is
fixed

Demand The demand in a fixed price The demand for the share is
issue is known only after the known after each day
closing of the issue 

Payment In a fixed price issue, you need The payment can be completed
to pay 100% of the price of the after the allocation
share at the time of bidding for
the share

4. Advantages and disadvantages of IPO

4.1. Advantages of IPO: 
Influx of Capital:
For any company, raising capital for its ventures is of paramount importance.
One can even go as far as to say that money is the lifeblood of any business
organization. But many times, it is an arduous task to raise money, especially since
it involves depending on venture capitalists and investors. In case of an IPO, the
public acts like a mass of investors, hence capital can be obtained quickly and
easily. This helps raise funds for providing a working capital, as well as for various
activities such as mergers, acquisitions, and for research and development,
eventually leading to expansion of the company. Additionally, the money influx
can be utilized for obtaining the necessary equipment and for marketing.
Improved Public Image:
Once a company is publicly listed, its public image is bound to improve. This
will attract investors, especially banks, which will be more inclined to invest in a
publicly listed company. The company’s working will be viewed as being more
professionally managed, and its dealings transparent, as it will be required to
periodically report to SEBI. Moreover, going public gives the company a shot at
branding, as IPOs are extensively covered by the media. The company’s overall
visibility will hence increase, and in turn, so will its credibility.
Liquidity:
Going public is immensely beneficial for the employees, the stakeholders as well
as the venture capitalists. An IPO is the perfect opportunity for wealth creation for
these key stakeholders who have toiled away, working hard to make the company a
success. A liquid market is created for the company’s shares, and the stakeholders
can reap the benefits. Unlike in a proprietorship, where the entrepreneur gets to
keep the profits, in an IPO, the money earned is shared among all the key players.
Employee Motivation:
After going public, the company may choose to provide perks such as stock
incentive packages to its employees. This will increase employee retention rate as
it will help provide motivation through incentives in the form of stock, for those
working for the company. Better and brighter talent will be attracted and
encouraged to perform well through this compensation strategy.
4.2. Disadvantages of IPO:
Costly and time-consuming: An IPO is an expensive and time-consuming process
that can take several months, or even years, to complete.
Increased Regulatory and Reporting Requirements: Publicly traded companies
are subject to increased regulatory and reporting requirements, which can increase
the company's compliance costs.
Loss of Control: Going public means that the company is owned by a larger
number of shareholders, which can lead to a loss of control for the founders and
management team.
Market Volatility: Once a company is listed on an exchange, the stock price can
be affected by a variety of factors, many of which are beyond the company's
control. This can lead to increased market volatility and price fluctuations.
5. IPO launching process
Step 1: Proposal Creation
The first step is to develop a proposal or so-called "book" that outlines the
company's business plan, financial situation, and investment opportunity. This
book is then sent to potential underwriters, who are banks or securities firms that
help sell the stock to investors.
Step 2: Underwriting Selection
Once an underwriter is selected, the company and underwriter will sign an
agreement in which the underwriter agrees to buy all of the shares being offered by
the company at a set price (the "offer price").
The agreement also typically includes an "over-allotment option," which gives the
underwriter the right to purchase additional shares (up to 15% of the total offering)
if demand for the stock is high.
Step 3: Team Assembly
 After the underwriting agreement is in place, the IPO team (which typically
includes investment bankers, lawyers, and accountants) works on putting together
the necessary paperwork for the SEC filing.
Step 4: SEC Filings
The company must file a registration statement with the SEC, which outlines the
terms of the offering and discloses information about the company's business,
financial situation, and risk factors.
The registration statement becomes effective after it is reviewed and declared
effective by the SEC.
Step 5: Road Show Marketing
After the SEC has cleared the offering, the underwriter will go on a "road show"
to market the stock to potential investors.
During this time, the company's management team will meet with institutional
investors, such as mutual fund managers and pension funds, to try to get them
interested in buying the stock.
Step 6: Pricing
The investment banks set the IPO price based on their assessment of investor
demand. Once the offering price is set, the company will sell its shares to the
underwriters at that price.
Step 7: Trading
The shares are then distributed to the underwriters' clients, and trading of the
stock begins on the open market. Institutional investors often buy large blocks of
stock when a company goes public, so they can sell them later at a profit.
Individual investors can also participate in IPOs by buying shares through a broker.
Step 8: Post-IPO
 After an IPO, some clauses may be put into place- for example, underwriters
may have a set amount of time to buy more shares after the IPO date. However,
certain investors might fall under quiet periods during this time.
The company will then be required to file periodic financial reports with the
SEC. The company's stock will also be listed on a stock exchange, such as the
NYSE or Nasdaq.
The company will now be subject to all the rules and regulations that apply to
public companies.
6. Underwriters
6.1. What Is an Underwriter?
An underwriter is any party, usually a member of a financial organization, that
evaluates and assumes another party’s risk in mortgages, insurance, loans, or
investments for a fee in the form of a commission, premium, spread, or interest.
6.2. Underwriters in an IPO process: 
6.2.1. Roles of IPO Underwriters:
There are many roles of IPO Underwriters, but their main role is conducting the
whole process of Initial Public Offerings (IPO). In the IPO process, there could be
either a single underwriter or a group of underwriters. When the size of issuance is
large, there exists a lead investor followed by a group of underwriters working
under him and together with him. Thus, the number of underwriters in the IPO
process would depend on the size of the public issue. The other name of IPO
Underwriters is Securities Underwriters or Equities Underwriters.
Mostly IPO Underwriters are Investment Banks and commercial banks, who
charge commission/fees for rendering all these services. They are acting as a
mediator between the issuing company and the subscribing public or institutions.
These Investment Banks work with the issuing company from the start of the
issuance process and remain with them till the end when the listing takes place.
They perform all the procedures with due diligence. Registration of these
Investment Banks takes place as securities brokers or dealers under the Securities
Exchange Commission (SEC)
6.2.2. Responsibilities of IPO Underwriters
Valuation and Expert Advice
The first responsibility of the Underwriter is to provide proposals/options
regarding the valuation and type of securities to consider for the purpose of public
issuance. The company asks various Investments Banks to provide such proposals
stating the valuation and best suitable advice for raising funds.
Underwriter Agreement
The second responsibility is coming up with the best agreement between the
Underwriter and the Issuing Company. The Investment Banks bear the
responsibility of the Initial Public Offering process according to the type of
contract they have signed. The rate of commission is also dependent on the type of
agreement. Thus the Investment Banks determine the type of Agreement according
to the size of issuance, risk factor, capacity of the underwriter, and so on.
7. Underwriting
7.1. What is underwriting?
Underwriting is the process through which an individual or institution takes on
financial risk for a fee. This risk most typically involves loans, insurance, or
investments. The term underwriter originated from the practice of having each
risk-taker write their name under the total amount of risk they were willing to
accept for a specified premium.
7.2. Why is underwriting needed?
The goal of underwriting securities is to ensure a successful issuance. The reason
is that the issuing company often wants to set a high price, but investors are
cautious and want the price to be lower than the market price to get more profit.
7.3. Types of underwriting: 
Three basic types of underwriting are involved in a cash offer: firm commitment,
best efforts, and Dutch auction.
Firm Commitment Underwriting:
In firm commitment underwriting, the issuer sells the entire issue to the
underwriters, who then attempt to resell it. This is the most prevalent type of
underwriting in the United States. This is just a purchase-resale arrangement, and
the underwriter’s fee is the spread. For a new issue of seasoned equity, the
underwriters can look at the market price to determine what the issue should sell
for, and more than 95 percent of all such new issues are firm commitments.
 If the underwriter cannot sell all the issue at the agreed-upon offering price, it
may have to lower the price on the unsold shares. Nonetheless, with firm
commitment underwriting, the issuer receives the agreed-upon amount, and all the
risk associated with selling the issue is transferred to the underwriter.
To determine the offering price, the underwriter will meet with potential buyers,
typically large institutional buyers such as mutual funds. Often, the underwriter
and company management will do presentations in multiple cities, pitching the
stock in what is known as a road show. Potential buyers provide information on the
price they would be willing to pay and the number of shares they would purchase
at a particular price. This process of soliciting information about buyers and the
prices and quantities they would demand is known as book building.
Best Efforts Underwriting:
In best efforts underwriting, the underwriter is legally bound to use “best efforts”
to sell the securities at the agreed-upon offering price. Beyond this, the underwriter
does not guarantee any amount of money to the issuer. This form of underwriting
has become uncommon in recent years. The underwriter does not commit to sell all
issues but try their best to sell them, if they fails to distribute all of the securities,
they will return the remainder to the issuer and incur no penalty
Dutch Auction Underwriting:
With Dutch auction underwriting, the underwriter does not set a fixed price for
the shares to be sold. Instead, the underwriter conducts an auction in which
investors bid for shares. The offer price is determined based on the submitted bids. 
A Dutch auction is also known by the more descriptive name uniform price
auction. This approach to selling securities to the public is relatively new in the
IPO market and has not been widely used there, but it is very common in the bond
markets.
7.4. The IPO underwriting process:
Underwriting an IPO can take as little as 6 months from start to finish, but it can
also take more than a year. While every IPO issue is unique, there are generally 5
steps that are usually common every issue underwriting journey which are as
follows:
Underwriting an IPO can take as little as 6 months from start to finish, but it can
also take more than a year. While every IPO issue is unique, there are generally 5
steps that are usually common every issue underwriting journey which are as
follows:
Opting for a bank:
The private entity selects an underwriter, usually an investment bank. It may also
opt for a conglomerate of investment banks or syndicate of underwriters. In this
case, one bank is selected as the book-running or lead underwriter. 
One type of agreement between the entity and the underwriters is referred to as
the firm commitment which guarantees that the IPO will raise a certain sum of
funds. Or they may settle for a best-efforts agreement in which the underwriters do
not guarantee the amount of funds they will raise. They can also settle for an all or
none agreement which says that the underwriter will call off the IPO altogether or
sell all the shares in the IPO.
Conduct due diligence and initiating the regulatory filings:
The underwriter and the issuing entity then create a registration statement. The
SEBI then does its due diligence on the required details in that document. While
the SEBI reviews it, the entity and underwriters will issue DRHP that includes
more details about the issuing company. They use this prospectus to pitch the
company’s securities to investors. These processes usually last for 3-4 weeks and
are mandatory to comply with the regulatory requirements. 
Pricing the IPO:
Once SEBI gives a go ahead to the IPO, the underwriters decide the effective
date of the issue. The day before this date, the private entity and the underwriter
meet to set the price of the securities. Underwriters often underprice the issue to
ensure that they sell all their shares, even though that means less money for the
issuing entity. 
Aftermarket Stabilization:
The underwriter's responsibilities continue even after the issue. They provide
analyst recommendations and create a secondary market for the securities. The
underwriter’s stabilization responsibilities only last for a short period.
Transition to market competition
The final step of the process begins 25 days after the IPO issue date which is the
end of the quiet period, required by the SEBI. During this phase, company KMPs
can not share any new information about the entity, and investors go from trading
based on the company's regulatory disclosures to using market forces to make their
decisions. After this phase ends, underwriters can give estimates of the stock price
and earnings of the company. Some companies also have a lock-in period after and
even before they go public, in which early investors and employees are not allowed
to trade or sell their shares.
8. Underpricing
8.1. What Is Underpricing?
An initial public offering (IPO) is the introduction of a new stock for public
trading on a stock exchange. Its purpose is to raise capital for the future growth of
the company. 
Underpricing is a term in finance that refers to the situation where the price of a
stock issued in an Initial Public Offering (IPO) is lower than its true value.
When a company goes public and lists its shares on the stock market, it issues a
certain number of shares to investors through an IPO. The stock price is
determined by the issuing company, financial experts, and securities agents.
However, in some cases, the stock price may be set lower than the true value of the
company, which is called "underpricing."
The basic formula for calculating underpricing is: 
[( Pm-Po)/Po] *100
Pm : the price of the stock at the end of the first trading day
Po : is the offering price 
8.2. Why does underpricing exist: 
Underpricing exists for several reasons:
Attracting investors: Underpricing is often used to make the IPO more attractive
to potential investors. When a company's shares are priced lower than their
perceived value, investors may view them as a good investment opportunity and be
more willing to buy them.
Reducing risk: When an IPO is priced too high, there is a risk that the shares
won't sell, which could be damaging to the company's reputation and future
fundraising efforts. By pricing the shares lower, the company reduces this risk.
 Generating publicity: Underpricing an IPO can generate buzz and media
attention, which can help raise awareness of the company and its products or
services.
Building long-term relationships with investors: Underpricing an IPO can help
build goodwill with investors and encourage them to hold onto their shares for the
long term.
However, it's important to note that underpricing can also have negative
consequences, such as reducing the amount of money the company raises from the
IPO, diluting the ownership stake of existing shareholders, and leading to a
potential loss of value for the company and its shareholders in the long term.
9. The cost of issuing securities
The cost of issuing securities depends on several factors, including the type of
security being issued, the size of the offering, and the method of issuance. Here are
some of the costs associated with issuing securities:
Underwriting fees: If a company is using an investment bank to help with the
offering, it will typically pay an underwriting fee, which is a percentage of the total
offering amount. This fee compensates the investment bank for its services,
including due diligence, marketing, and pricing the offering.
Legal and accounting fees: Companies must comply with securities laws and
regulations when issuing securities, which can involve significant legal and
accounting work. This can include preparing a prospectus or offering
memorandum, filing registration statements with the SEC or other regulatory
bodies, and conducting audits and other financial reporting requirements.
Printing and distribution costs: Companies must produce and distribute offering
documents, which can involve significant printing and mailing costs.
Marketing and advertising costs: Companies may incur costs associated with
marketing and advertising the offering to potential investors, including roadshows
and other investor presentations.
Listing fees: If the securities are listed on a stock exchange, the company will
typically pay a listing fee, as well as ongoing fees for maintaining the listing.
Other fees: Other costs associated with issuing securities may include fees for
transfer agents, trustee services, and other third-party service providers.
It's important to note that the costs of issuing securities can vary widely
depending on the specific circumstances of the offering. Companies should
carefully consider the costs and benefits of an offering before deciding to proceed,
and work closely with their advisors to minimize costs where possible.
 CONCLUSION
It is evident that venture capital and IPO play crucial roles in the activity of the
financial market. Venture capital is instrumental in providing early-stage funding
to young companies with high growth potential, supporting innovation, and
creating new job opportunities. While IPOs enable successful, established
companies to raise additional capital from public markets, facilitating expansion,
and providing liquidity to investors.
Both venture capital and IPOs are also essential for the economy's overall health
and growth. By supporting innovation and providing capital to emerging
companies, these funding sources help drive economic growth, job creation, and
industry advancement. Additionally, IPOs provide a way for the public to invest in
successful companies, allowing for broader and more democratic access to
investment opportunities.
REFERENCES