What is an IPO:
Initial public offering is the process of going public for a private company or organization. By going public company gets fund which can be used for various purposes like debt payment, expansion, working capital need or sometime purely for legal reasons. When a company goes public then private investors and founders get a chance to liquidate their shares as part of offer for sale to realize gain for their investment. IPO also allows general public and various financial institutions to invest in company.
Before offering an IPO company must fulfil rules and regulation set by financial regulators and government, after fulfilling these rules a company can file for IPO. An IPO can be an exit plan for private and angel investors to liquidate their initial investment in the company. Initial Public Offering transforms a Private Limited company to a Public Held company. After IPO company lists on stock exchanges where its shares can be bought or sell by anyone and being on stock exchange forces company to disclose financial results and key managerial decisions or any changes for public.
Before going public, company hires an investment bank to advise it for IPO process. This investment bank along with company management decides company’s valuation, purpose of IPO, balance sheet, last 3 years profit and loss statement, promoters and current investors details, face value of share, lot size, share price (band). After fulfilling all formalities company prepares a document which is known as Draft Red Herring Prospectus (DRHP). This red herring prospectus goes to Securities & Exchange Commission (SEC) and after their approvals company publishes IPO details in press and media.
Who can apply for an IPO:
To apply for an IPO there are few eligibility criteria for an individual by fulfilling these anyone can apply for IPO:
· A PAN number issued by Income Tax department of company.
· A person needs to have a valid Demat Account.
· If person wants to sell shares then he/she need a Trading Account along with Demat account.
Going public allows the company to gain these advantages:
A huge capital which can be used for expansion.
Capacity to acquire or merge with another company.
Facility to competitively attract talented management and employees.
Enormous increase of investment value for the original private investors and promotors.
But an IPO also poses disadvantages:
Process incurs huge costs such as investment bank fee and legal fees.
Original owners and investors may not be able to sell their shares of stock immediately, as doing so could reduce the stock price.
Control of the business goes to the Board of Directors. This may or may not be comprised of the original corporate owners.
Company is now under constant scrutiny by the SEC (SEBI).
Points to know before applying for an IPO:
If you have bought an IPO for the company, you are exposed to that company. You bear a direct impact on its success and loss of company, so do your research before investing.
It is this asset of your portfolio which has the highest potential to reward the returns. On the same time, it can sink your investment without a sign. Remember stocks are subjected to the volatility of the markets.
You should know that a company which offers its shares to the public is not responsible to reimburse the capital to the public investors.
You should weigh up your potential risks and rewards before investing in an IPO.
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