Private companies usually comprise of a very small number of shareholders (owners) consisting of its founders, angel investors, venture capitalists etc. General public cannot purchase the shares of a private company until the company’s shares are offered for sale to the public. But there are times and phases in the life cycle of a private company when it comes across the need for substantial funds to fuel its growth and expansion projects and sometimes even for survival. In order to procure funds, private companies primarily have two options – debt and equity. Going by the equity route, the owners of a private company offers to sell the ownership rights of the company to the public in the form of shares (share of ownership). The quantum of ownership to be offered for sale depends on several factors and varies from company to company. When a private company makes this offering for the first time, it is called an IPO or the Initial Public Offering.
The most significant purpose served by an IPO (initial public offering) is that it lets companies raise additional capital funds. The need for these funds may arise on account of different reasons like new product/market development, increase in production/operations, building up of new factory/plant, and expansion of supply chain/distribution network and so on. In addition to the strengthening of the company coffers, IPO also serves a few ancillary benefits. Coming to public scrutiny and being listed on a stock exchange adds up to the credibility, reputation, brand value and brand equity of the company. This also helps public limited companies in the future to attract investment from the financial institutions of the country or from foreign business entities (in the form of FDI and FII) subject to the performance of the companies and governed by the applicable regulatory framework. Another strategic utility of IPO is giving effect to the exit strategy. An exit strategy may become a necessity for entrepreneurs, founders, venture capitalists etc in the face of the emergence of any positive or negative contingencies. Unlike in debt financing where the principal has to be repaid and interest has to be paid, in equity/IPO funding, only the dividend has to be paid to the shareholders subject to profits.
The need for these funds may arise on account of different reasons like new product/market development, increase in production/operations, building up of new factory/plant, and expansion of supply chain/distribution network
Roadmap for IPO
The first step towards IPO is hiring the services of an investment bank as an underwriter. The underwriters serve as the bridge between the company and the public. These underwriter investment banks work towards ensuring that all the statutory obligations pertaining to an IPO are duly fulfilled. The underwriting entity also takes care of the financial valuations related to the IPO. There’s a deal that is entered into by the company and the underwriting entity. The next step is the filing of the necessary documents with the regulatory body which scrutinizes the information submitted and upon their conviction and fulfillment of the compliance parameters, the IPO is approved. While the aforesaid IPO approval from the regulatory body is awaited, the underwriter prepares the Red Herring Prospectus that contains information about the company except for the issue price of shares and the quantum of securities to be issued. The red herring prospectus is issued to potential investors. This phase is marked by promotional efforts to attract interest for the IPO. After consideration of several financial and non-financial factors, the company and the underwriter arrive at a suitable issue price of the shares before the effective date.
The first step towards IPO is hiring the services of an investment bank as an underwriter. The underwriters serve as the bridge between the company and the public
The shift from being a private company to a public company mirrors a significant milestone for a business. It reflects a company’s appetite for growth and expansion. However, the decision to go for an IPO involves careful deliberations as there are several pros and cons attached with going public. Public companies are subject to increased and stringent compliance’s, formalities, disclosures, reporting and accountability.
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