There is something almost paradoxical about Initial Public Offerings, better known as IPOs; on one hand, you seem to know precisely what they are and yet, you might also be in the dark as to how they actually work. So, it won’t really hurt to go back to the basics and revisit all you need to understand about IPOs all over again before you actually apply IPO next time.
In its simplest terms, an IPO means the launch of a company’s shares to the general public. This launch itself indicates that a company has gone “public” – meaning that its ownership has also been offered to public investors to own in the form of shares. This is why an IPO is called an Initial Public Offering.
Most IPOs are launched by companies with the primary objective of raising capital – either for business expansion or for some new enterprise or project. But an IPO can also be launched to raise funds which can be used to settle debts or even allow private investors or even founders of the company to exit, having realized the gains on their own seed investments.
An IPO is not a random decision made on a whim. It is arrived at after months and possibly years of a well-planned and strategic thought process. It is usually decided when a company has achieved a specific milestone from which it can proceed further only by raising capital and expanding its business operations. Once this has been confirmed and agreed upon, a company makes it known that it intends to go “public”.
The company’s underwriters draft a suitable proposal of the securities to be issued, price for the offer, number of shares and the approximate schedule for the same. An IPO team comprising underwriters, lawyers, accountants and exchange officials, then gets to work to file the required documents for an IPO application. Thus, the work of these underwriters is quite essential to ensure an IPO’s successful launch.
The aforementioned team compiles all the documents for the IPO application. The primary document is the S-1 Registration Statement which consist of both the prospectus, which is also known as a Shelf Prospectus and other filing information. This statement contains only preliminary details of the estimated date when the IPO application will be actually filed. It, alongside the prospectus, is revised extensively during the IPO process.
The IPO team then works on forecasting a level of demand for the upcoming IPO and determining a suitable price for the offer. There can be revisions in these details as well if required. It is extremely important that the company complies with and adheres to the exchange listing requirements and regulations to ensure the approval of the offering.
Before an IPO is finally issued to the general public for subscription, it also passes through the scrutiny and approval of anchor investors. These are renowned institutional investors such as pension funds, insurance firms, and mutual funds. They are responsible for supporting or “anchoring” an IPO’s prospects before it is released to the public.
On the date decided for issuing the shares to the public, the IPO is launched, and the retail investors are informed through various channels such as news, public announcements, press releases or even intimations made by broking houses and banking and financial institutions to their respective customers.
Investors can apply IPO for a period of 3 trading days. During this time, the shares issued to retail investors yield capital that is accounted as “shareholders’ equity” in a company’s financial statements and accounts. The value of shareholders’ equity does determine the final balance sheet value of a company.
Investors might already be aware of how IPOs can be advantageous for them but the main advantage of an IPO, for the company, is that it enables the latter to raise necessary capital for business expansion and new projects. With new capital, a company can also embark on renewed initiatives to acquire more customers and even take a company’s stature and reach to new heights.
It is generally assumed that an IPO automatically makes a company popular among investors and thus an attractive investment opportunity for the public. Of course, this depends also on how fundamentally strong and renowned the company might be, to begin with, but with a strong company going public, retail investors can apply IPO to capitalize on a chance to participate in its growth journey and thus increase its profitability.
Moreover, an IPO necessitates quarterly reporting of results and performance, and this brings about more transparency which in turn enables a company to access more borrowed capital on more favourable terms. With new SEBI guidelines in place, regarding regulations for anchor investors and restrictions on selling, there is also a greater level of trust and integrity among investors for new public offerings of reputed companies.
Investors might find certain IPOs too expensive to bid for and this might be a factor that could dampen the general sentiment of enthusiasm. For some companies, an IPO is construed as a risk that most managers would be unwilling to take. Some small or medium enterprises might launch IPOs to raise funds for paying off debts and liabilities. On occasion, an acquisition or merger might appear to be a feasible means to raise more capital and streamline operations and costs. Moreover, some investors might also be hesitant to apply for an IPO if they discern some of the above reasons behind a public offering.
It is generally assumed that every IPO is instantly a very attractive opportunity for every investor. However, this is not so. As said earlier in this article, an IPO can be an underhand means for a company to pay off liabilities and debts and to bid for such an IPO would mean taking on obligations yourself. Moreover, it can be an even more spurious gambit for newer companies to emerge on the radar of reputation. It is always advisable to factor certain crucial aspects to make sure that its IPO is indeed worth investing.
Many full-service brokers, such as Mirae Asset Sharekhan, provide in-depth and regular research resources to help investors analyse IPOs comprehensively and take well-informed decisions regarding the same. We can recommend you watch out for the latest updates from our dedicated IPO page, which also provides detailed information on the offerings that our in-house Research team recommends.
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