Artile by: Nitesh Kumar Gond
Finance is considered as an important aspect of any business enterprise. Funds in the form of capital are required to operate a business and to plan and execute the future projects of the business. Finance and financing are required by all the enterprises on a regular basis for its growth, expansion and existence. There are various modes of financing available to the enterprise, one of the equity-based modes of financing is Initial Public Offering.
Initial Public Offering (IPO) is a mode of financing enterprises for raising a huge capital for the growth and expansion. In an IPO, the ownership of a company is diluted by offering its stake to the general public which includes individual as well as institutional investors for the first time. This process is also known as going public where the company gets listed on the public stock market. An IPO is underwritten by an investment bank i.e. investment bank makes all the arrangements to list the company on the stock market. Investment banks are also responsible for preparing all the details regarding the offering which is disclosed to all the potential investors in the form of a lengthy document known as Red Herring Prospectus.
IPO is not a widely preferred mode of financing due to the scale of investment it deals with. Despite this, there are various advantages of IPO mode of financing. Some of such advantages are:
- IPO brings large investment from a diversified pool of investors.
- IPO is considered as cheaper sources of capital as more money can be raised with lower cost.
- IPO provides an exposure to the company as it is listed in the stock market i.e. access to Capital Market
- IPO provides liquidity to the company’s management.
- IPO involves participation of the public in the business as owners, this helps businesses to gain a stature and credibility in the national and international market.
Similarly, there are some of the disadvantages involved in the IPO mode of financing. some of such disadvantages are:
- IPO will make the business public, therefore such companies opting for IPO need to follow strict law compliance.
- IPO mode of financing requires the business to disclose all the financial and business information to the public.
- IPO is a lengthy process and involves a long compliance list before and after the business gets listed.
- It is not for everyone to raise capital from the public through IPO as there is an equal chance risk of not raising the expected fund.
- IPO diversify the ownership structure, therefore, the promoters and business owners may lose their control over ownership of business.
IPO process consists of various steps which are as follows;
- The company going for IPO has to select an investment bank for the process.
- Investment banks (IB) will perform due diligence and registration functions.
- IB will meet various institutional investors for book building. Book building is the valuation process of the company going for IPO.
- Details regarding the IPO is made available to all the public and parties.
- IB will list the company on the stock market and provide stabilization for a short duration of time.