subject: Introduction To Ipo [print this page] An initial public offering (IPO) is the first offering by a company of its shares to investors from the general public. This stock market launch enables a company to attain a publicly listed status, which means that the company loses its private standing and must now share financial, operational, managerial, and other information with the investors via the company website, annual reports, board meetings or investor presentations.
Benefits
Augments and diversifies the equity base
Enables cheaper capital access
Renders more exposure to the organization
Enhances goodwill and reputation of the company
Retains efficient management and staff through equity participation options like ESOPs
Helps a company in funding its mergers, acquisitions, etc.
Creates multiple financing options like convertible preference, convertible debt, etc.
Risks Involved
Considerable accounting, marketing and legal costs
Mandatory requirement to divulge business and financial information at regular intervals
Competitors gain access to crucial business and operations-related information
Eats into a lot of timeand energy of senior management
Non-subscription of a considerable number of shares by investors would make the entire IPO process a failure and leave a scar on the company's reputation
The IPO process generally requires involvement of one or more investment banks, which are referred to as underwriters. The issuing company enters into a contract with these underwriters to seek their assistance in the IPO process. This help includes assessing the share price, reaching the investors, buying the shares in the event of non-subscriptionby investors, etc. These underwriters charge their fee in the form of commissions in lieu of the services offered.
The company even employs the services of legal experts, who have expertise in securities laws, in view of the fact that the process is an expensive one and does involve some legal complications.
There are two ways in which the issue price of shares can be arrived at:
Fixed price method: The company, along with the assistance of underwriters,fixes up a price at which the shares would be offered
Book building method: Thisinteractive process involves creating, capturing and recording demand of investors for shares, which leads to a price discovery.
The company engages in a lot of publicity to bring the upcoming IPO into limelight so that it catches the public eye. All that one needs to do is keep himself abreast with the latest IPO news along with a tab on best performers, current and forthcoming IPOs.
