IPO or Initial Public Offering is a process through which privately-owned companies can go public i.e., offer their shares to the general public through stock exchanges.
These companies usually decide to go public and raise funds through IPOs for various reasons such as capital expenditure, debt repayment and to give exit way to their anchor investors. The IPO not only helps the businesses financially but also helps in enhancing the brand’s market visibility.
Through IPOs private companies can raise equity capital by issuing new shares to the public and an opportunity for retail as well as institutional investors to participate in the offering and become shareholders of the company. The capital raised is then utilized by the company for growth and expansion whereas the investors may reap profit from their shareholding.
Advantages of an IPO for a private company
Even though the key objective of an IPO is raising capital, it also has some other advantages. Let’s look at those –
1. Capital availability at a lower cost.
2. Helps in acquisition deals in the future.
3. Enhances the company’s public image and reputation, that can aid sales and profits.
4. It provides convenience in raising additional funds via secondary offerings as the public market is already accessible.
5. It helps in attracting better management and proficient employees for the company through liquid stock equity participation like ESOPs – a strategy used by many companies to compensate their employees.
Steps of IPO(Initial Public Offering) process
An IPO goes through these steps from inception to allocation –
- The process of taking a company public starts with gathering a team of merchant bankers, financial accountants, auditors and lawyers so that they can assist the company in filing the IPO and executing it.
- This team of experts will deal with all the norms prescribed by the stock market regulator SEBI or Securities and Exchanges Board of India. The IPO registration process has multiple aspects like outstanding litigation, capital structure, financial statements, business summary, reasons to go public, plans on funding utilization, etc.
- The stock markets regulator reviews all the details mentioned in the document submitted by the experts at the time of registration and then takes a decision on the eligibility of the IPO. If required, SEBI asks for additional details from the company and then approves the IPO.
- As a part of the process, the company has to file DRHP i.e., Draft Red Herring Prospectus. This document contains information like the IPO size, the number of shares to be offered to the public, the IPO funds utilisation plan, revenue and profit details, financial statements, business description including the revenue model details, management’s view on the business prospects, and so on.
- Once the company files its DRHP, it also sets the price band with which the company would like to go public. This price band is at with the shares would be bought by the general public. This is one of the most critical steps in the entire process as this can sink or swim the deal.
- Then the company decides the dates in which it will offer shares to the public. In that window the general public will submit applications for buying the shares. Once the subscription window is closed the company allocated the shares to investors.
- The last leg of the IPO process is listing the company on stock exchanges. Once the shares are issued to the public in the primary market (in IPO), they are eligible to be traded on a daily basis in the secondary market.
Before any company goes public or decides to do so, there are many parameters that come into play. The company needs to ensure that the environment and overall growth of the company are favorable for an IPO. Additionally, the timing of the launch is crucial, and overlap with other IPO releases is largely avoided.