What is an IPO?
An Initial Public Offering (IPO) marks the initial issuance of a company's shares to the general public. This strategic financial move loosens the accumulation of equity capital from public investors, converting the company into a publicly traded entity wherein shares are available for purchase by anyone. The IPO not only performs as a means to raise capital but also has the potential to improve the company's public perception while concurrently reducing its equity and debt costs. Preceding an IPO, the company is classified as a private entity, characterized by a limited number of investors, comprising early contributors such as founders, family, and friends, alongside professional investors like venture capitalists and angel investors.
How IPO Works
An Initial Public Offering (IPO) represents a previously private company's introductory public issuance of shares. This process serves as a mechanism for the company to procure equity capital from the public and carry out its transition from a private to a public entity.
To initiate an IPO, a company must satisfy specific criteria and adhere to regulations stipulated by the Securities and Exchange Board of India (SEBI), the regulatory body overseeing public companies. Collaborating with an underwriter, typically an investment bank, is imperative for tasks such as document preparation, price and date setting, share marketing, and distribution to the public.
From the perspective of the company, an IPO may function as an exit strategy for founders and early investors, enabling them to realize profits from their initial private investment. Simultaneously, it presents an avenue for the company to expand and flourish by gaining access to additional capital and enhancing credibility in the market. However, the IPO path is not without challenges, encompassing heightened public scrutiny, regulatory compliance obligations, and a renounce of certain aspects of corporate control.
For prospective investors, participation in an IPO involves bidding for shares through a broker. Successful bids result in the allocation of shares, providing investors with opportunities for profit through subsequent share sales on the stock exchange or dividends from retained shares. Nonetheless, investors are exposed to the inherent risks associated with potential declines in share price below the IPO level or adverse company performance in the post-IPO period