Initial Public Offering refers to the process when the first time a private company issues shares to the public where companies fulfill the requirements by exchanges and the Securities and Exchange Commission (SEC).
India witnessed over 10 Public Offerings (IPOs) where at least three of them were subscribed over 100 times, leading to some of the highest subscribed IPOs of the decade. Companies representing IT, food and beverages, BFSI sectors governed the IPO calendar annually.
Public share issuance permits a company to raise capital from public investors, who can also participate in the offering. The shift from a private to a public company is a crucial time for private investors to receive gains from their investment as it comprises share premiums for current private investors.
A primary market is introduced with new securities being issued for the first time. Post the listing process on the stock exchange, the company becomes a publicly-traded company and the shares of the firm can be traded freely in the open market.
Prior to becoming public, the company hires an investment bank to manage the IPO. The investment bank and the company plan out the financial details of the IPO in the underwriting deal. Further, they file the registration statement with the SEC. It examines the revealed information and if discovered correctly, it permits a date to proclaim the IPO.
Companies and their need to offer IPOs
Companies use IPOs to heighten their business outcomes and raise funds from the market to back the same. Providing an IPO is a money-making practice. Every company needs money to work beyond the boundaries for enhancing the business with the equipped infrastructure, including a way to repay loans.
Stocks traded in the open market imply more liquidity which paves the way to employee stock ownership plans such as stock options and other compensation ideas luring the talents in the cream layer.
The whole process of being public means the brand has thrived enough to get its name highlighted in the stock exchanges. It becomes a matter of credibility and pride to any company.
A public company can invariably issue more stocks in a highly demanding space which will lead to purchases and associations as the stocks can be issued as a part of the agreement.
Following are the types of stocks
- Fixed price offering: It is the price that companies decide for the initial sales of their shares. The company declares the price of the initial public offering in advance so that when an investor participates in a fixed price initial public offering or makes an application, then he/she agrees to pay the entire amount.
- Book building offering: The stock price is provided in a 20% band where the interested investors place their bid before the final price is decided. The lower level of the price band is known as the floor price, while the upper limit is the cap price. Investors need to state the number of shares and the price they want to acquire. It enables the company to check the interest for the initial public offering among investors. The last decision regarding price depends on the investors’ bids.