The craze for stock trading has increased in the past couple of years. India’s stock markets have witnessed an all-time recently. This has made people more attracted ad interested in trading activities.
This in turn has encouraged more and more companies to go public in recent times. As per reports, at least 15 companies launched their initial public offerings (IPOs) in 2020. The response they received was overwhelming. In the Q1 of 2021, seven companies have gone public, and over 20 others are expected to do the same by December 2021.
But what does it mean ‘to go public’? How does an IPO help the company and its investors? For all those wondering how all this works and what are the advantages and disadvantages of an IPO, let us understand the concept first.
What Is An IPO?
IPO or an Initial Public Offering is the name of a process when a private corporation sells its shares to the public for the first time. Through this, a company’s ownership transitions from private ownership to public ownership. This also means that the company will now be listed in the stock market.
How Does A Company Go Public?
A company has to go through a lot of legal hassle while going public. There is a ton of paperwork to be filed before a company can launch an IPO. Not only that the process is very time-consuming. It is only when a company meets the requirements of the SEBI, can it successfully launch an IPO.
Securities and Exchange Board of India (SEBI) is the regulatory body for the securities and commodity markets in India under the jurisdiction of the Ministry of Finance, Government of India.
To make the listing easier, many private companies hire underwriters which are usually investment banks. The companies consult with the underwriters on the matters of the IPO and they even advise what the initial price of the offering should be.
Underwriters help management prepare for an IPO, creating key documents for investors and scheduling meetings with potential investors, called roadshows.
Once the initial price is set, the underwriter issues shares to investors, and the company’s stock begins trading on a public stock exchange. The IPO will be live for the Public to apply for shares on the date mentioned in the prospectus.
Advantages Of IPO
- The major benefit of launching an IPO for a company is that it can raise a lot of capital through it. Through the course of running, a company may need funds to function further. If the initial investors are unable to provide the funds, a company has an option to approach the banks but the high ROIs is always a drawback.
- One of the main purposes of a company to offer an IPO is to let early investors in the company cash out their investments.
- IPO gives a company a lot of Public Exposure. When a company goes public, it reaches a lot of people giving it an additional boost of publicity.
- Going public also improves a company’s credibility. Since the process of filling for launching an IPO requires a company to share all its financial documents with SEBI, it gives a sense of transparency to the investors.
- After becoming a public limited company it becomes easier for a company to do mergers and acquire other companies.
Disadvantages Of IPO
- Launching an IPO is a costly affair for any company. From underwriting charges, legal fees, accounting costs, registration fees, advertising costs, and other charges, the company has to prepare itself financially.
- The company loses its autonomy once it goes public.
- The company that goes public is required to conduct regular audits and has to publish financial reports every quarter. These may lead to an increase in cost as it will have to hire specialists from time to time.
- Going public also means that the company is required and expected to perform well regularly putting an unrequired pressure at all times.
The shares introduced through IPO are priced at a lower scale which gives a low-risk investment opportunity to people. Investing in IPO can help investors to earn short-term, as well as in the long run.
