IPOs: Understanding one of the foremost ways for companies to raise capital

An initial public offering (IPO) is the one of foremost ways for companies to raise capital. Through an IPO, a privately held company is able to list its share on different bourses. This allows the general public to buy, sell and trade the shares through stock brokers on stock exchanges. An IPO is considered to be something that most companies go through when they reach a certain size. Usually, this is when a company reaches more than $1 billion in valuation when it can be termed a ‘unicorn’.

Why do companies launch IPOs?

The biggest reason for launching an IPO, or going public as it’s often called, is that it allows corporations to raise funding on a massive scale. With the ability to raise money like this, the company is able to grow and expand. But access to capital is not the only reason for a company to go public.

Most corporations when private still have investors in the form of venture capitalists, angel investors, founders, promoters, employees, and even family and friends in some cases. These investors wish to see a return on their investment and the reason behind investing in a company is to sell the privately held shares at a profit. But when a company is private, these shares can be harder to sell and share. Going public allows the existing investors of a private corporation to cash out more easily.

Finally, there is also the consideration that an IPO not only brings attention to a company but increases its prestige and exposure as well. The company becomes more transparent due to regular financial reporting which allows it easier access to borrowing.

These other factors are just as important in companies deciding to launch an IPO as companies are permitted to directly list on exchanges without launching an IPO first.

What is the IPO process?

Launching an IPO is actually a complicated and long process. The company first contracts an IPO lead manager for the public listing. A lead manager is a Securities Exchange Board of India (SEBI) registered entity that will be responsible for guiding a corporation through the entire process. Also called the Book Running Lead Manager (BRLM), the lead manager is responsible for creating the documents on behalf of the company to give to SEBI like the draft red herring prospectus (DHRP). The corporation and the lead manager also often contract a consortium of other investment banks as underwriters to ensure widespread distribution of the new IPO shares.

After necessary documents like the red herring prospectus, which contains all financial and other relevant details of the company going public, is given to the authorities, the company applies to the stock exchange where it wants to list its initial issue.

Receiving the proper approval, the lead managers market the IPO. A date is announced during which investors can bid for shares of the company. The corporation can decide to reserve a certain percentage of shares for certain classes of investors like retail investors, foreign institutional investors, etc. The corporation can either set a fixed price for the shares in the IPO or set a price band for the shares within which investors can bid. Upon the bidding closing, the shares are allotted on a lucky draw basis and proportionately if the quantity of bids outnumbers the shares available.

Once the allotment process is finalized, the shares finally can be listed on the stock exchange where they can be traded between investors.

Read all the Latest News , Trending News , Cricket News , Bollywood News , India News and Entertainment News here. Follow us on Facebook , Twitter and Instagram .