Getting Started with 'IPO'

 

What is an IPO?

Money generates more money. So goes an old proverb. This is especially true in the case of business expansion. Companies require cash on a regular basis in order to grow. An initial public offering (IPO) is a method of acquiring capital from the public.

Borrowing from the market (or, to be more precise, the general public) is often an easy alternative for a growing company that has already drained a lot of its private resources. To borrow money from the general public, a company must list itself on the stock exchange. The initial public offering, or IPO, is the process of a company being listed on a stock exchange. This procedure gives businesses the legal authority to borrow money from the general public.

An initial public offering (IPO) is the sale of a company's shares to the general public, institutional investors, and high-net-worth individuals for the first time. A firm becomes a public company after it makes its initial public offering and is listed on stock exchanges. It was previously a private company. This means that, while the company's shares were formerly owned privately, they are now held by the general public following the IPO's launch. To put it another way, an IPO is a process through which a private company goes public by selling its stock to the general public.

Any firm, whether it is a startup or an established private corporation, can register for an IPO and become a public company. The company either issues new shares to the general public or its stakeholders sell their existing shares to the general public without raising any new capital in this process.

After the launch of the IPO, a company’s shares are traded in an open market.

What is the need for an IPO?

When a private firm becomes profitable and decides to expand, it will require additional funds to carry out its plans. Going public is the most natural way to generate equity capital at this point.

Companies file for an IPO for a variety of reasons, including the ones listed below:

1. Since they are publicly listed, they can raise capital from a larger pool of investors, i.e. the general public.

2. Mergers and acquisitions are enabled and facilitated by the IPO launch.

3. Allow insiders and shareholders to access funds. Early employees and investors could hold valuable ownership positions in the company but have no way of selling their stake. After an IPO, they can finally sell their shares, use the cash to diversify their investments, make luxury purchases, contribute to charitable causes, and many other pursuits.

4. Gain credibility and visibility. Having shares traded on a major exchange might boost a company’s reputation and image.

5. Helps to attract talent. With publicly traded shares, it can be easier to offer stock compensation plans to employees, which can make the company a more attractive place to work.

Eligibility to launch an IPO in India

To be listed on India's two major stock markets, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), a company must have a minimum paid-up capital of Rs 10 crores.  The company’s post-issue market capitalization should also not be less than Rs 25 crores.

Disadvantages of an IPO launch

Not all companies (even big, well-known ones) decide to go public. Some may even go through the IPO process but later decide to become private again. While the benefits of an IPO might seem appealing, companies that go public also face risks, including:

1. The pressure to perform well in each quarter can distract from long-term focus.

2. Making their finances and other sensitive corporate information public.

3. Complying with extra regulations (and filing a great many mandatory reports). Apart from the fact that it would have to do extensive paperwork and comply with a multitude of market security norms, the company will also have to make substantial spending in launching the public offer.

4. The high cost of both preparing for an IPO and keeping up with accounting and regulatory requirements.

5. Loss of control to shareholders and a board of directors. Also, a public company has a much greater exposure and faces regulatory scrutiny at all times.

Alternatives to an IPO

Businesses that don’t want to use a traditional IPO might choose a special purpose acquisition company (SPAC). A SPAC is created by investors to hold an IPO, raising money to buy or merge with another company. SPACs offer some benefits over the traditional IPO, such as:

Lesser time to complete: The SPAC process takes just a few months versus six to 12 months for an IPO.

Quick deal-making: SPACs must buy or merge with another company within two years of raising funds, or they have to give the money back (plus interest).

Shorter lockout periods: Sometimes, a SPAC has a shorter lockout period than an IPO, meaning insiders can sell their shares sooner.

If a company is not willing to go public, it has other options to raise capital, via private equity, venture capitalists, or angel investors.

Conclusion

When a firm first makes its shares available for sale to the public on a stock exchange, it is known as an initial public offering or IPO. Companies often go public to raise funds, but they may also do so to attract talent, allow early investors to cash out, or boost their public profile. Going public, on the other hand, has several disadvantages, including a loss of control, increased rules, and the public disclosure of corporate information.