We know the initial public offering IPO is a procedure by which a company hand out its shares to the public for the first time and thus becomes public. Selling its shares helps to raise a huge load of money from public investors with ease and within no time. The change is a very crucial step for investors to gain their profits from their investment. By going through with IPO, the company gets eligible to be on the stock exchange list. This process also generates a chance for clever investors to earn a large amount of money by investing.
In the early times, the Dutch were 1st to lay the present-day financial organizations we see today out in the world. The first present-day IPO happened in March 1602. It was when the Dutch East India Company put forward the company’s shares to the public to raise the money. Thus, the Dutch East India Company became the 1st organization in all history to share the company’s stock.
Different Types Of Initial Public Offering IPO
- Fixed Price Offering Fixed Price IPO is usually mentioned as the fixed rate. It’s the rate at which the company has set to sell its initial stocks or shares. The investors are told about the rates of these shares and are manipulated into buying them.
- Book Building Offering After the sales of initial shares, if the investors are still interested, they keep an auction. It is where the investors can bid upon the stocks. Investors need to specify the total shares they want to buy and then bid. We refer to the lowest share price as floor price and call the highest stock price as cap price. The last price of the shares is dependent upon the investor’s bid.
Are IPOs Good Investments?
The idea of IPO is pure, but they’re not always a good choice for the ones who are investing, especially the ones with no experience. Investing can be profitable when done with care. But it has a riskier prospect when investing in new companies rather than already well-established ones. Thus one should do a proper background check, consult with others, and be sure before investing in the shares market.
Things That Investor Ought To Know Before Investing
- If the investor invests in an IPO, he/she will bear the fortunes of the profit. But they will be liable to losses and will affect them.
- One’s investment can sink at any time, depending on the volatility of the shares market. Hence one should be very careful during the investments.
- If you are a newcomer in the investment and shares market, do consult others and then invest.
Causes For Making The Company Public
1. A company’s status changes from private to a public organization when it gives up its securities to offer and sell it to the public.
2. The company can go to the market to raise money at any time.
3. The company’s market values increase by going through an IPO. The company gets permission to use a higher amount of capital.
4. Instead of cash, stocks can be used as acquisitions. Stocks are the instruments used to enlist and train executives and other employees.
5. Stocks are given as gifts, bonuses, and even as compensation to employees. They do it to keep their motivation up for work.
6. Going public makes the organization prestigious on a large scale. Also, it makes it more reliable for investors.
7. It helps to create awareness about the brand of the company.
Advantages Of Going Public
- The main benefit of going through with IPO is access to the money of the market.
- Increasing, expanding, altering, and modifying the equity base
- Hiring better staff and employees to increase productivity through liquid equity engagement.
- Creating many windows for employees, investors, and the general public with ease. Like equity etc.
- Access to money is cheaper this way.
- The money of investors does not need not to be returned. IPO investors only seek gratitude and profits if or when made.
- Investors looking to invest can find a great business through IPO. They can later sell the shares again if not interested anymore.
Through IPO general public is also made aware of the company’s presence. This leads to awareness leads to popularity, thus bringing in customers and orders.
Basic Terms That Are Mandatory In Initial Public Offer IPO
i. Issuer – It’s a term given to the firm or given wanting to go public through the process of IPO.
ii. Underwriter – An underwriter is known to be banks, financial firms, even public firms. It aids the company in selling the shares. The underwriters also guarantee to buy the shares if they are not sold due to some reasons.
iii. Green Shoe Option – It is known as the overallotment course of action. It is an accord by the underwriter where the company can sell more shares than initially planned. It allows the issuer firm to sell additional shares in the market in the case of high demand.
Eligibility Of An Individual To Apply For Initial Public Offering (IPO)
An adult individual is eligible to enter into a legal contract to apply to a company’s IPO.
The eligibility norms are:
- Investors must have a PAN card issued by the Indian tax department.
- An investor needs to have a valid dematerialized account.
- They must have a trading account; a dematerialized account also completes the purpose. But if an investor decides to sell shares, he must have a trading account.
- It is always better to open trading and dematerialized accounts altogether.
Process Of Initial Public Offering (IPO)
Given are the steps necessary for an organization to follow for going public through IPO:-
Step 1: Choosing A Bank Ready To Invest
Reliability and trusted bank
- The quality of bank Industry expertise if needed by the company.
- Relationship of the bank with the company before IPO.
Step 2: Documentation And Fillings
Following arrangements are done for the company by the underwriter:
The bank has to draft the following documents:
a. Engagement Letter: it includes –
- Reimbursement clause: This clause states that the company has to cover all the bank’s expenses for IPO, even if someone withdraws the IPO at any marketing stage.
- Gross spread = Sale price of the shares by the bank – Sale price of the shares from the company by the bank. We fix the gross spread at 7% of the proceeds.
b. Letter of Intent: A letter of intent usually accommodates –
- A commitment that the company will provide all the information to the relevant bank.
- An agreement that the company will pay 15% of the total profit to the underwriter.
c. Underwriting Agreement: Signing of the agreement after the letter of intent is the procedure. Thereafter, the underwriter is bound to sell the shares from the company at a fixed rate.
d. Registration Statement: This statement has all the details related to the IPO. The financial statistics of the company, background, and uprising of the company. It also has legal obstructions faced by the organization in the past. Also, it uses the ticker symbol once the company lists on the stock exchange.
The registration statement has 2 parts:
- The Prospectus: Issued to all the investors buying the stocks.
- Private Filings: Data given to SEC comprises this document but is not shown to the general public.
e. Red Herring Document: The bank creates an initial prospectus consisting of all the company documents, save the starting date and rates. Upon making the red herring document, the organization and the bank starts to market. Often ads, plays, shows attract the investor’s attention.
Step 3 Rate Of Shares
The factors later influence the offering price:
- Whether the roadshows, plays, etc. done are flop or success.
- The aim of the company and its objectives.
- Condition of the market economy at that present time.
Step 4: Stabilization
- To contribute analyst guidance.
- Handling destabilization if any.
- Create a market well suited for the stocks
If a company has to sell the shares at a low price for some reason, the bank handles the imbalance created. It’s called aftermarket stabilization.
Step 5: Entering Into Market Competition
A private company can transition to a public corporation through an IPO. It does so by selling its shares.
i. Expansion as it has a money boost now.
ii. Having the option of combining with other companies.
iii. Compete and attract other managements.
iv. The numbers of investors increase, thus help in funding.
i. Accounting and marketing prices rise to a significant amount. ·
ii. Hiring lawsuits as legal risks increase and hence lawsuits. Thus the rise in total costs increase.
iii. Losing privacy, meaning Financial and business disclosure, is a must among shareholders.
iv. Hiring bigger management requires more time and need more time and effort.
v. There is a huge risk of the funds not increasing; rather, they may decrease over time.
vi. Due to a snitch in management, the company may lose important information.
vii. Loss of control over the company and rules is a big blow due to increased shareholders.
1. How does the initial public offering work?
A company sells its shares to the public investors with the help of underwriters to turn public.
2. Why does a company need to go through IPO?
An expanding company needs funds continuous stream. Sometimes the demands are not met. To meet the demands and raise the capital with ease, companies go through IPO.
3. Can a company again become a private firm after going public?
It depends if the individual can buy all the shares of the company from the public or not. If yes, then he can turn the organization private once again if he desires.
4. Should a person invest or not?
One should invest as it increases the chances of earning money through investment. But one should do it with caution as there is a big risk of loss in it.
5. Is there always a profit in investing?
It depends upon how and on whom you invest. Many times an investor faces dejection and losses because of his wrong choice to invest. Hence one should invest with care.