An initial public offering is a term used when the first time a firm sells its stock to the general public. When a private corporation decides to go "public."
In other words, a formerly privately held corporation becomes a publicly traded company.
A corporation has very few stockholders before its IPO. The founders, angel investors, and venture capitalists are all included. During an IPO, however, the corporation sells its shares to the general public. You can become a shareholder by purchasing shares directly from the corporation as an investor.

Background of Initial Public Offering (IPO)

The publicans were the oldest kind of firm that traded public shares under the Roman Republic (later the Roman Empire). The publicans, like current stock companies, were legal entities that possessed shares in modern financial organisations.

The Dutch are acknowledged as being the forerunners of the contemporary financial system, which gave rise to IPOs in their current forms. The Dutch East India Company auctioned its shares in order to raise additional funds in March 1602 in the earliest known recorded occurrence of an IPO.

The Dutch East India Corporation was the first to offer bonds and stock to the general public, making it the first publicly traded company to be listed on an official stock exchange.

How does It work?

Before an IPO, a firm is a private entity that is not traded on a stock exchange. Initially, the private firm has a small number of stockholders, including the founders, family, and certain professional investors.

When a firm reaches a point in its development where it feels it can withstand the stringent rules of a financial regulator (in India's case, the SEBI), it will begin to publicise its desire to go public or to be listed on a stock market.

The steps involved in launching an IPO may be summarised as follows:

• Underwriters give proposals and valuations that outline their services, the best form of security to issue, the offering price, the number of shares to be published, and the projected time period for the market offering.
• The corporation uses an underwriting agreement to choose its underwriters and legally agree on underwriting terms.
• Create a board of directors.
• Every quarter, ensure mechanisms for reporting auditable financial and accounting information.
• On an IPO day, the firm issues its shares.
• Some post-IPO provisions might be implemented.

An IPO is critical for a growing company because it opens the door to new capital. This allows the firm to expand beyond its initial setup and also leads to increased openness and reputation, which can be used to recruit new investors and borrow money.

A company's first public offering is priced to cover due diligence. When a corporation is listed publicly, the formerly privately held shares are publicly traded, and the current private shareholders' shares are equal to public shares.

Allocation of Shares in an IPO

When it comes to Initial Public Offerings, there are many types of investors. This includes the following:

• Buyers from Qualified Institutions (QIBs)
• Investors that are not institutional (NIIs)
• Individual Retail Investors (RIIs)

In an IPO, the distribution of shares varies for each of the above groups. You fall into the last group as an individual investor.

Individual investors can invest in small lots of Rs 10,000-15,000. You can apply for a maximum of Rs 2 lakh in an IPO. The entire demand for retail shares is determined by the number of applications received. You are offered a complete allocation of shares if demand is less than or equivalent to the number of shares in the retail category.

Oversubscription occurs when the demand exceeds the available allocation. For example, an Initial Public Offering is frequently oversubscribed five times over. This suggests that the demand for shares is five times greater than the supply! In such circumstances, a lottery system distributes retail shares to investors. This is a computerised mechanism that assures investors equitable distribution of shares.

Initial Public Offering Procedure

A Private Company has to take several steps in order to go public. The steps are as follows:

Selecting an Investment Bank

The initial stage is to find an investment bank to serve as an underwriter. An investment bank's function here is to assist the firm in establishing numerous elements such as

• What amount of money the firm expects to raise
• The types of securities that will be available
• The first share price

Multiple investment banks may be participating in a major IPO. In summary, investment banks serve as intermediaries in the IPO process.

Formation of the Red Herring Prospects

The 'Red Herring Prospectus' is the next phase in the IPO process. This is accomplished with the assistance of underwriters. The prospectus covers sections such as financial records, future goals for the firm, market risks, and estimated share price range. After creating the red herring prospectus, underwriters frequently go on road shows to seek possible institutional investors.

SEBI authorisation

The prospectus is submitted to India's Securities and Exchange Board (SEBI). If SEBI is satisfied, the initial public offering (IPO) procedure is approved. It also provides a date and time for the IPO. However, if SEBI is unhappy, it requests revisions before the prospectus may be released to public investors.

Approval from the stock exchange

The process of allowing securities to trade on a recognised stock exchange is known as listing. However, the firm must first be approved by the exchange. For example, the Bombay Stock Exchange (BSE) has a listing department that approves company stocks. The BSE has a set of requirements that must be fulfilled in order for a company to be listed on its exchange.

Share subscription

After completing all of the formalities, the corporation makes the shares accessible to investors. This is done on the indicated dates in the prospectus. Finally, investors who want to apply for shares must complete and submit an IPO application form.

Listing

The shares are distributed to various investors depending on the demand and price stated in their IPO application forms. Once processing is completed, the stakes are credited to the investor's Demat account. In the event of oversubscription (when the demand for shares exceeds the quantity of shares floated by the firm), investors may not get the amount of shares they requested. As a result, they may receive fewer shares when the lottery is completed. Some investors may not receive any shares at all. In such circumstances, the investors' money is refunded.

Advantages & Disadvantages of Initial Public Offering

The advantages & disadvantages of an Initial Public Offering are listed below:

Advantages

• Expanding and diversifying the equity base
• Cheaper ways to get capital
• More visibility, status, and a better public image
• Ability to recruit and hire superior personnel, as well as manage them via liquidity participation
• To make acquisitions possible.
• Creating different funding options like stock, convertible debt, etc.

Disadvantages

• Increased marketing and accounting charges that will bite as time passes
• Sensitive financial and company information must be disclosed.
• To guarantee that an IPO goes successfully, management must invest more time and attention.
• Additional money may not be available if the firm does not perform effectively.
• Competitors or even consumers may take advantage of the public revelation of information.
• The early shareholders may lose their independence when new ones enter through the opportunity to purchase new shares.
• Litigation, private securities, and other types of derivative actions will put the firm at risk.

Conclusion

For a good reason, initial public offerings (IPOs) are significant events in the stock market. Investing in the appropriate firm may earn high profits in the long run. The difficulty is to separate the top performers from the others.

For any legal services, contact Online Legal India .