The craze for stock trading has increased in recent years. Indian stock markets have witnessed a recent record high. This has made people more attracted to advertisements interested in commercial activities.
This, in turn, has encouraged more and more companies to go public in recent times. At least 15 companies reportedly launched their initial public offerings (IPOs) in 2020. The response they received was overwhelming. In the first quarter of 2021, seven companies have gone public and another 20 are expected to do the same by December 2021.
But what does “go public” mean? How does a IPO help the company and its investors? For those of you wondering how all of this works and what are the pros and cons of an IPO, let’s first understand the concept.
What is an initial public offering?
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, the ownership of a company passes from private property to public property. This also means that the company will now be listed on the stock market.
How do you go public?
A company has to go through a lot of legal trouble while going public. There is a lot of paperwork that must be filed before a company can launch an initial public offering. Not only that the process is time consuming. Only when a company meets the SEBI requirements can it successfully launch an initial public offering.
Securities and Exchange Board of India (SEBI) is the regulatory body for the securities and commodities markets in India under the jurisdiction of the Ministry of Finance of the Government of India.
To facilitate listing, many private companies hire underwriters who are typically investment banks. Companies consult with underwriters on IPO matters and 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 road shows.
Once the initial price is established, the insurer issues shares to investors and the company’s shares begin trading on a public stock exchange. The initial public offering will be available for the public to apply for shares on the date mentioned in the prospectus.
Advantages of the IPO
- The main benefit of launching an initial public offering for a company is that you can raise a large amount of capital through it. Throughout its operation, a business may need funds to function better. If the initial investors cannot provide the funds, a company has the option of approaching the banks, but the high ROI is always a drawback.
- One of the main goals of a company when offering an initial public offering is to allow the company’s early investors to withdraw their investments.
- The IPO gives a company a lot of public exposure. When a company goes public, it reaches a lot of people by giving it an added advertising boost.
- Going public also improves the credibility of a company. Since the filling process for launching an IPO requires a company to share all of its financial documents with SEBI, it gives investors a sense of transparency.
- After becoming a corporation, it is easier for a company to merge and acquire other companies.
Disadvantages of the IPO
- Launching an initial public offering is an expensive affair for any business. From subscription fees, legal fees, accounting costs, registration fees, advertising costs, and other fees, the business has to prepare financially.
- The company loses its autonomy once it goes public.
- The publicly traded company must conduct regular audits and publish financial reports every quarter. These can lead to an increase in cost as you will have to hire specialists from time to time.
- Going public also means that the company is required and expected to perform well on a regular basis, putting unnecessary pressure at all times.
Shares introduced through the IPO are priced on a lower scale, providing a low-risk investment opportunity for individuals. Investing in IPOs can help investors win in both the short and long term.