IPO, as we all know that IPO stands for Initial Public offer. It is a process of raising fund from the public by Companies, which are in the process of more expansion. Before we directly jump to what is IPO and its features, let us understand the basic concept of IPO. To understand this concept better we will create a small story around it.
Let’s assume you have a brilliant business Idea of featuring a mobile application to provide the real time update of stock market along with bit of relevant details and trading calls for various investors like Retail, HNIs, Financial institution. To execute this potential idea what is the very first thing you need. Of course its fund, money, right? So where would you get this money from? Who comes first in your mind to which you will share your idea to raise the fund? Is it your Papa? Yeah! You are right, it’s family. Initially we pitch our business Idea with our family and friends in order to raise the fund.
So now, your family is impressed with your brilliant idea and you get the fund to found your startup. Now your idea is working well and created a significant demand amongst the Investors. You seek a potential growth in it and want to expand your business, you need more funds let’s say 5 cr. to hiring more employees, setting up office, marketing and administration. Now where would you get that money from?
At this stage you will seek to private equity investors who can understand your business model and see a future stick growth in it. You get a private equity investor who is ready to invest in your business model. This investor is like an angel to your business, so he is an angel investor for you.
More years pass by and your business doing fantastic, beating the market challenges. And you are registered as a Pvt. Ltd. Company. In few more years down the line, the valuation of your company is pretty good and competitive, according to the market demands and advancement of technology you are willing to expand more, and you will need comparatively more money. What will you do now? Go to the bank and financial institutions. Suppose you receive a part of fund which you required. So for rest of the fund you can raise it from public by issuing IPO and get listed on the stock exchange.
So we can see that your company decides to fund the capital partly through debt and also file for an IPO “Initial Public Offer”. When your company files for an IPO you have to offer the shares to the public. General public will subscribe to the shares.
Because you are offering shares of your company very first time to the public, it is called IPO. Public subscribe the shares by paying some price.
Going public is a crucial financial event for any company. The company and its top management is liable to answer few questions to the public.
- Why did the Company decide to go public?
- What would happen to the existing share holders after the IPO?
- How does the IPO process evolve?
- Who are the financial intermediaries?
- What is the issue size, face value of the share?
- What are the opening date and closing date of the issue?
Now here we will cover the general query related to the IPO:
Why do companies go public?
When a company decides to go for public the primary reason is to raise the fund to fuel the capital requirement. Now you will think the company can take only loan or go for debt. Yes it can go, but to raise the fund in debt Form, Company will need to pay finance charges. Whereas issuing shares provide better profitability.
What are the other advantages of issuing IPO?
- Provide an exit gateway for early investors. After going public, shares of the company start trading in the market amongst the retail investors. Early investors – Promoters, angel investors, PE Fund, Venture capitalists can sell their shares in the open market. By selling their shares they get an exit o their initial investment in the company.
- Reward for the employees working in the company. Shares would be allotted to them as an incentive. The stocks offered to the employees known as “Employee Stock Option”. Generally the shares are allotted to the employees at discount.
- Going public increase the transparency and visibility of the company’s every action.
Who are the intermediaries in an issue?
There are various intermediaries to full fill different purposes. Those intermediaries are: Merchant bankers, Syndicate members, Registrar of the Company, Auditors of the company, Underwriters, Solicitors etc. are the intermediaries to the issue.