Complete Guide of What an IPO is and How It Works in 2020

What is IPO and How it Works in 2020

What is an IPO?

If you are a Student, Professional or a Businessman then you must know what an IPO is and How it works.

So, if you are curious to know about What an IPO is and How it works

Let’s dive in..

An IPO (Initial Public Offering) is the process of offering shares of stock to the public for the first time and collecting funds for their business.

For e.g. A 45 years old Garment Company operating in Surat Gujarat, wants to get into the Branded Apparel business. The Company has years of expertise behind it but the promoters of this company want to build a brand.

They can’t borrow from banks because they borrowed a lot already then they had only one option to choose the IPO route. The IPO recourse can be even more attractive when the market is on high.

Initial Public Offering allows a company to raise capital from public investors. IPO is also known as “Going Public”.

Companies do not enter the stock market until they launch their IPOs. If Investors buy the IPO of a particular company then they become a Stakeholder of that company.

IPO is a significant stage of growth for many companies, as it provides them with access to the public capital market and also increases their credibility and exposure.

What is the Process of IPO?

The prior stage of an IPO is hiring an Underwriter, almost always a merchant bank (Investment Bank) to advise the fund and maintain the trade record of the business.

The merchant bank typically approaches institutions and investors to create initial interest in the IPO that is called “Roadshow” and will help with the quality of research and distribution.

The underwriter is also responsible for the IPO by purchasing the company’s entire offering at an agreed-upon price, then selling that stock publicly itself that is called “Firm Commitment”. The alternative is the “best effort commitment” in which the underwriter sells the entire shares but does not provide any guarantee for further response and subscription. 

The company, aided by its underwriter, must apply to the SEC (Securities and exchange commission) for registration and review their process. In the process of registration that contains key information about the company, including financial and ownership details.

The SEC conducts Due Diligence and Filings to ensure that all information in the registration document was accurate and complete

After doing all the stuff the SEC approves the IPO, a date of IPO is set, Generally, it takes more than a month.

An IPO can be an opportunity for private equity and venture capitalists to cash out and take profits.

What Companies Should Consider while Hiring Merchant Banks?

Well, Most of the companies are very careful while hiring Merchant Banks because they know if they hired the wrong merchant banks then it will delay the whole IPO process.

Companies should consider the reputation and track records of IPOs to raise funds, How they are doing the quality of research (Valuation, Pricing), how they are experts on distribution, how they market their IPO to retail investors and Institutional Investors.

Pros and Cons of an IPO

As said earlier, what is IPO and how it works

Now, We are moving forward to what are the pros and cons of an IPO. 

Pros of IPO

Increased Capital

This is the primary benefit of the company is to raise capital quickly by reaching a large number of investors at the same time. Capital raised during going public, which can be used for capital budgeting, debt reduction etc

Liquidity

The employees, the Stakeholders and the Venture capitalist put their effort to achieve massive success, then Liquidity comes for different kinds of stakeholders. For Ex. Promoters and early shareholders, these shareholders could be angel investors, Private Equity, Employees themselves they can cash out this stake of their needs any time they want.

Improved Finances

This is the financial picture of the company that gets better when it comes to financial statements. Your company valuation is generally higher than any private company the reason behind this, Companies strictly require all they disclose all the information related to business to the public as per regulations by SEBI.

Cons of IPO

Time and Expenses

As said earlier, The process of Public Going is quite lengthy and cost consuming. As we said “Time is Money” Companies should invest a lot of time while raising Capital through IPO it’s common for an IPO to take anywhere from six to nine months or longer than this. During this period, the company’s management team is likely to be focused on that company, which causes other areas of businesses that can hurt profit. Additionally, the whole process of an IPO cost is enormous for business. They have many expenses.-For instance Accounting Fee, Underwriting Fee, Legal Fee, Filing Fee etc. All these tasks require the company to hire specialists and pay them hefty fees.

Loss of Privacy

The dark side of the coin for those businesses who are transforming itself from Private to Public company is a disclosure of crucial information about the company that is readily available to the company’s competitors. According to SEC regulations, companies need to release all operating details to the public, including all sensitive information about their market, profit margin and their future goals. An untold number of problems arises when your competitors know all the inner workings of your company.

Loss of Control

One of the major drawbacks of Public going is promoters tend to lose their control over the workings of the corporation. Earlier, The Promoter of the company was the only decision-maker but now they have a certain number of Shareholder, Promoter need to approve from Shareholder before making any decision. Whenever company promoters have some plan then they need to arrange meetings for shareholders to make a decision, shareholders have the power to reject those decisions they have the authority to change the Board of Directors members.

Conclusion

An Initial Public Offering may or may not be the right decision of your company. IPO has its Pros and Cons while this article covers all the important aspects of an IPO. 

If you want to know about the Stock Market then fill out our form and get all stock market-related blogs into your inbox.

You May Also Like

About the Author: Irfan

Hey There, I'm a Digital Marketer Since 2018 & Founder of StayBlogger.com - A Blog about How to make money through Blogging and Digital Marketing Tips. I had done more than 10 International SEO Projects I know which is not enough but for starting Level it is Great for me. I have Set my Goal is to make $5000 by the end of 2020.

Leave a Reply

Your email address will not be published. Required fields are marked *