By Sahil Shah (FYBCom Student at KJ Somaiya Arts and Commerce College)
You may be surprised to see such a topic at blogs on markets. Yes! In the world of Technology, our markets have also upgraded to technology. We have heard the term IPO in our younger standards, but have you ever learned about it? If the answer is NO, don’t worry! I’m here to help you out. And if the Answer is YES, people trust me, you are going to learn more about it.
IPO i.e. Initial Public Offering or Stock Market Launch is a type of Public offering in which shares of a Private Company are sold to institutional or Individual Investors that in return, sells shares to the general public, on a Stock Exchange for the first time. Through this process, a Private Limited Company Decides to turn into a Public Limited Company. Initial Public Offerings are mostly offered by those companies Raising capital, for monetizing the investments of early private investors and to become Publicly Traded Company. Although IPO offers many advantages, there are also significant disadvantages, chief among these are the costs associated with the process and the requirement to disclose certain information that could prove helpful to competitors. The IPO process is colloquially known as Going Public.
Details of the proposed offering is disclosed under a lengthy document known as prospectus. IPO is undertaken by most of the companies with assistance of a bank, acting in the capacity of an underwriter. Underwriters mainly are the persons who provide several services including help with correctly assessing the value of shares (Share Price) and establishing a public market for Share (Initial Sale).
In terms of size and public participation, the most notable Worldwide examples are the Coal India (2010), Bharti Infratel (2012) and Avenue Supermarts(D-Mart) (2017).
So far you maybe knowing what an IPO is. Did you ever thought how did IPO originate?and from where did it originate? Lets explore it.
In the early modern period, the Dutch were financial innovators who helped lay the foundations of modern financial system. The first modern IPO occurred in March 1602 when the Dutch East India Company offered shares of the company to the public in order to raise capital. The Dutch East India Company (VOC) became the first company in history to issue Bonds and Shares of Stock to the general public. In other words, the VOC was officially the first Publicly Traded Companies, because it was the first company to be ever actually Listed on an official Stock Exchange. While the Italian city-states produced the first transferable government bonds, they did not develop the other ingredient necessary to produce a fully fledged Capital Market: corporate shareholders.
A Courtyard in Dutch registered the history. (Beurs Van Hendrick de Keyser in Dutch by Emanuel De Witte, 1653) Modern-day IPOs have their roots in the 17th-century Dutch Republic, the birthplace of the world’s first formally Listed Public Company, first formal Stock Exchange and market. The Dutch East India Company (also Known by abbreviation “VOC” in Dutch) found on 20th March, 1602. ‘Going Public’ enabled the company to raise the vast sum of 6.5 Million Guilders.
Pros And Cons
When a company lists its securities on a Public Exchange, the money paid by the investing public for then newly issued shares goes directly to the company (primary offering) as well as to any early private investors who opt to sell all or a portion of their holdings (secondary offering) as part of the larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to provide itself with capital for future growth, repayment of debt, or working capital. After the IPO, when shares trade freely in the open market, money passes between public investors. For early private investors who choose to sell shares as part of the IPO process, the IPO represents an opportunity to Monetize their investment. After the IPO, once shares trade in the open market, investors holding large blocks of shares can either sell those shares piecemeal in the open market, or sell a large block of shares directly to the public, at a fixed price, through a Secondary Market Offering.
An IPO accords several benefits to the previously private company:
- Enlarging and diversifying equity base.
- Enabling cheaper access to capital.
- Increasing exposure, prestige, and public image.
- Attracting and retaining better management and employees through liquid equity participation.
- Facilitating acquisitions (potentially in return for shares of stock).
- Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.
There are several Cons to completing an initial public offering:
- Significant legal, accounting and marketing costs, many of which are ongoing.
- Requirement to disclose financial and business information.
- Meaningful time, effort and attention required of management.
- Risk that required funding will not be raised.
- Public dissemination of information which may be useful to competitors, suppliers and customers.
- Loss of control and stronger agency problems due to new shareholders.
- Increased risk of litigation, including private securities class actions and shareholder derivative actions.