IPO or initial public offering is a buzzword these days because of many factors. A large number of companies are moving towards the IPO process and issuing shares and also IPO has given huge returns to the investors over the past few years.
In this article, we will disclose all the details about an IPO and also the advantages and disadvantages of Initial public offering.
What is an IPO
Initial Public offering is a process by which a private company will issue the company shares to the general public. After the issue of the shares the company will no longer a private company, but it will be termed as a public company. Before the IPO process, all the shares of the company are held by the company promoters and investors. But after the IPO process, a certain percentage of shares will be held by the general public in the process, the public will become part of the company. And hence the company will be a Public limited company after the IPO process. And also the company shares will be listed on the stock exchanges. IPO is the only process by which the company shares can be listed on the stock exchanges such as NSE and BSE.
Why does a company go for IPO
Most of the companies and especially the startups that have reached the status of a unicorn($1 Billion valuations) will keep going for an IPO as the next step in the growth process.
when a company goes for an IPO, it will issues shares to the investors. In this manner, the company will raise capital. The capital is so huge and depends on the companies valuation and the shares prices which are decided by a team of investment bankers hired by the Company for this purpose. This capital that the company raises can be used for the working capital requirement, Can be used to expand to a new location and expand the business into new verticals. And also can be used for a lot of other requirements of the business. These requirements for which the capital will be used have to be disclosed to the regulatory and also to the general public by the company before raising the IPO so that the investors will be in a position to take a decision to invest or not.
IPO will also a process by which the existing investors who have invested in the company in the early stages will sell their shares and exit the company. IPO process in this manner provides liquidity to the existing shareholders.
Provided credibility to the company which is going public as it will be discussed a lot in the market after listing in the stock exchanges and it will get a lot of exposure in the investor’s community. It also improves transparency in the company has it have to meet all the regulation set by the regulators and exchanges. Fines will be imposed and certain actions will be taken against the companies which fail to comply with the regulations.
Will give a true picture of the market valuation of the company. And the market valuation will keep changing based on increasing or decreasing growth.
Disadvantages of going PUBLIC
IPO process involves a lot of costs for the company. the costs though are less than the capital that is to be raised, the company has to bear these costs on its books when going for the IPO process. There are costs concerning legal, accounting, registration, advertising and others.
When a company goes for the public, the company is no longer a private company and is hence a public company. And hence there is a loss of autonomous control over the company. The company will now have to meet the expectation of a large group of investors and for each decision, require the approval of a majority of these investors.
And hence as there is a change in the ownership of the company, the direction of movement of the company might change based on the preferences of the new community of investors, whose approval is needed for all the futures plans of the company.
Even after the IPO process and listing on the exchanges, the company has to constantly comply with the regulation set by the regulators and exchanges, and all these will add to the costs for the company. There are requirements such as audit requirements as set by the SEBI which will be a cost to the company as long as it listed in the stock exchanges.