What is an IPO?
IPO refers to Initial Public Offering. It is the process of transforming a privately owned and invested company into a public company by offering new stock issuance. IPO enables a private company to raise funds from public investors.
This process creates a golden opportunity for smart public investors to get a high rate of return on their investments. This transition from a private company to public ones is important for private investors to gain a good amount from their investments as it includes the share premium for recent private investors.
But don’t forget that risk always goes hand-in-hand on every investment in share market. Before you start any investment, it is good to be informed about the company and its shares scenario.
What is the working of IPOs (Initial Public Offerings)?
Before issuing an IPO, a company is considered to be a private company. With the consistent business growth, the company moves on a pre-IPO private company in which business shares are owned by some of the investors such as founders, family and other close relations.
On the other hand, if we talk about the issuance of IPO then it is big step for raising funds of the company at massive rate. This also boosts up the ability of the company to expand.
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When a company is eligible to issue IPO (Initial Public Offerings)?
When a company starts believing that it is mature & capable enough to fulfilling the guidelines of rigors of SEC regulations. The company should also be mature enough to fulfilling the benefits and responsibilities of public shareholders.
Generally, the company reaches to the stage it has reached to the monetary valuation of approximately $1 billion, also called as Unicorn Status.
However, this is not mandatory, many private companies at different monetary valuations but with strong aspects and potential to generate company growth and profitability have been qualified for IPO.
How IPO shares are priced in a company?
IPO shares of company are priced on the basis of underwriting due diligence. When a company switches from private to public, the existing private shareholders become public shareholder with the net worth of their shares at public trading prices. Share underwriting also includes special provisions for private to public share ownership.
Who can invest when a company issues IPO?
When a company is opens up its share in public market then it is with the sole purpose of business growth and raising millions of investments from public investors. Whosoever is interested in buying the shares of the company can contribute to the business capital by purchasing equity shares of the company. By public investors we mean by the individual or institutional investor who have keen interest in buying the shares of the company.
The number of shares that a company wants to sell and the price for which shares are sold generates the company new shareholders equity value.
How the word IPO (Initial Public Offerings) originated?
The term IPO has been originated a long ago on Wall Street when Dutch East India Company offered IPO to general public.
Since then, IPOs are being used as a potential source by top companies to raise capital from public investors by issuing shares to them.
Passing through all the years, IPOs have crossed through various kind of uptrends and downtrends in issuing due to various factors. At the initial period, Tech IPOs hiked at the boom stage as the startups having no revenues listed itself on stock market.
Recently, IPO listings of the company is based on the private value of more than $1 Billion.
What is the process of IPO?
When a company launches its IPO then this process is undertaken in two parts-
- Pre-Marketing Phase
- IPO Launch
The company which is interested in IPO will advertise to underwriters and ask for bids. A public statement can also be issued to embed interest. Then a company choose one or multiple underwriters to manage IPO different parts. The involvement of IPOs is seen at every aspect of the IPO such as diligence, document preparation, filing, marketing, and issuance.
How to launch an IPO? [Step-by-Step Process]
1. Proposals
Underwriters present
- Proposals & valuations discussing their services
- Best type of security to issue
- Offering price
- Amount of shares
- Estimated time frame for the market offering
2. Underwriter
Underwriter is a party that evaluates and assumes other party’s risk for a fee which is taken in the form of commission, premium, spread, or interest. The company planning to launch IPO chooses its underwriters on its own and agrees to underwriting terms through an underwriting agreement.
3. Team
IPO teams are formed combinedly with underwriters, lawyers, certified public accountants (CPAs), and Securities and Exchange Commission (SEC) experts.
4. Documentation
Information related to company is compiled for required IPO documentation.
The S-1 Registration Statement is the primary IPO filing document. It has two parts
- Prospectus
- Privately held filing information.
The preliminary information included in S-1 is about the expected date of the filing. The information including the prospectus of the company will be revised often throughout the pre-IPO process.
5. Marketing & Updates
The prime requirement before the new stock issuance is attractive marketing material. Underwriters with marketing executives estimate the demand of new company shares and establish the final offerings, however they are allowed to make revisions in financial analysis throughout the process of marketing.Companies take the necessary measures to meet specific public share offering requirements.
6. Board and Processes
Now a team of board of directors is formed to ensure the processes for reporting auditable financial and accounting information quarterly.
7. Shares Issued
Shares are issues on IPO date. Capital from the primary issuance to shareholders is received as cash and recorded as stockholders’ equity on the balance sheet. Subsequently, the balance sheet share value becomes dependent on the company’s stockholders’ equity per share valuation comprehensively.
8. Post IPO
Some post-IPO provisions such as specified time frame to buy an additional number of shares after the initial public offering (IPO) date by Underwriters may be instituted.
Advantages of an IPO
The primary objective of an IPO is to raise business capital. Here are some advantages It can also come with other advantages.
- With IPOs the company is allowed to raise the capital by issuing the shares of the company to public investors.
- Easy to establish Facilitates acquisition target if it has publicly listed shares and also easier acquisition deals (share conversions.
- Quarterly reporting increases the transparency which furthermore help a company to receive more favorable credit borrowing as compared to when it was a private company.
- Transforming from private to public company also raises the opportunities to add more funds to company’s capital in the future through secondary offerings because it has already been introduced in public market through IPO.
- Public companies can attract superior management through liquid stock equity participation (e.g. ESOPs). Many companies prefer to compensate executives or other employees through stock compensation at the IPO.
- Lower cost of capital can be expected with IPOs for both equity and debt.
- Company exposure and public image automatically gets raised which ultimately increases the company’s sales and profits.
Disadvantages of IPO
Several disadvantages of transforming from private to the public are given below-
- IPO is an expensive affair, the cost of maintaining a public company is relatively expensive than other costs involved in business.
- The company is required to disclose financial, accounting, tax, and other valuable business information while this transformation from private to public. These valuable disclosures may reveal the company’s business secrets and help competitors to have a sneak peak on your methods.
- Legal, accounting, and marketing costs arises during this transformation.
- Reporting and management requires increased time, effort, and attention.
- If the market does not accept the launched IPO price of the company, then it will adversely affect the required funding of the company.
- New shareholders also get control over company’s important decisions through their given voting rights via board of directors. Somehow company loses control over there.
- Risk of legal or regulatory issues gets increased, such as private securities class action lawsuits and shareholder actions.
- Management might be distracted with the fluctuations in the company’s share price which can be compensated on stock performance rather than real financial results.
- Various strategies used to inflate the value of shares like using excessive debt to buy back stock may increase the risk firm instability.
What are IPO Alternatives?
▶️ SPAC (Special Purpose Acquisition Company)
SPAC refers to special purpose acquisition company (SPAC) is a publicly-traded company whose prime motive is to raises capital through an IPO in order to gain control on the stake in a company. These SPACs companies are also known as blank check companies as the target company is not known at the time of the IPO.
When SPAC gone public within two or three years it acquired more than two companies. By company acquiring we mean that transformation of a private company in public ones without paying for IPO.All the fees and underwriting costs gets covered before the target company ever gets involved.
Large private equity firms like TPG and The Carlyle Group and household brands like Hostess have been sponsored by merging with SPACs.
▶️ Direct Listings
Direct listings refer to the process in which IPO transformation is conducted without the involvement of any underwriters, which means the underwriting process is completely skipped in direct IPO listing. In this IPO issuer company bare more risk if the offering did not do well in the market, on the other hand, benefits as well from a higher share price, This is preferable only when the company is a grown and well-known brand.
What is the process of investing in IPO?
If you want to invest in the shares of the company follow the given 4 brief steps to do so-
- Investor need to acquire physical application download the application from a broker of bank branch distributor.
- Now fill up all the mandatory details personal and DEMAT bank account details.
- Provide the total amount that you want to invest.
- The shares of that amount will be allotted to the investor in 10 days from the date of closing.
What factors affect the return from an IPO?
There are multiple factors that affect the return amount from IPO. Most of the IPOs are known for generating profits with short-term trading as they are introduced to the public. However, some of the IPO are overly-hyped by the banks that result in heavy losses at initial state.
Here are few factors that must be taken in consideration while investing in an IPO-
▶️ Waiting Periods
Some banks have waiting period according to which some shares are left aside to be purchased after a specific period of time. This price may increase if allocation is bought by underwriters otherwise it may decrease.
▶️ Flipping
Flipping is a tactic of selling IPO stocks in the initial days of purchase to earn quick profits at the beginning. Common in the case of stock is discontinued and takes of on initial days of trading.
▶️ Lock-Up
The contracts between the underwriters and insiders of the company that resists them from selling stocks for a specific period of time legally bind with the help of a lock-up agreement. This lock-up period varies from 03-24 months. All the investors are allowed to sell their shares after the lockup expires which severely puts downward pressure on the stock price.
Who can invest in IPO?
The demand of new IPO is often more than its supply. This does not mean all the interested investors will be able to purchase the shares later on. Investors can have access to IPO through their brokerage firm. Else, other options to invest in an IPO is through Mutual fund or other investment option that focus on IPO.
List of Upcoming IPO in India 2021
| Name of the company | Opening date of the IPO | Closing date of the IPO |
| Vijaya Diagnostic Centre | September 01, 2021 | September 03, 2021 |
| Ami Organics | September 01, 2021 | September 03, 2021 |
| Naapbooks | September 01, 2021 | September 06, 2021 |
| BEW Engineering | September 02, 2021 | September 07, 2021 |
| Platinumone Business Services | September 02, 2021 | September 07, 2021 |
Expected Upcoming IPO in India
| Name of the company | Expected issue size |
| Fincare Small Finance Bank | Rs. 1,330 crores |
| Aadhar Housing Finance | Rs. 7,000 crores |
| Utkarsh Small Finance Bank | Rs. 1,350 crores |
| Shriram Properties | Rs. 800 crores |
| Seven Islands Shipping | Rs. 600 crores |
| ESAF Small Finance Bank | Rs. 1,000 crores |
| Studds Accessories | Rs. 450 crores |
| Star Health And Allied Insurance | Rs. 3,000 crores |