Initial Public Offering

We must have come across this term very often- IPO or “Initial Public offering.” So what exactly is an IPO? In the most basic terminology, an IPO is the foremost sale of stock by a private company to the public. The basic purpose of conducting an IPO is to raise money.

In private companies, the shareholders are generally less in number, so beyond a certain point, they start facing shortage of finance. To overcome this problem, the private company offers its stock for sale to the general public, and when a company does it for the first time, it is called Initial Public Offering. It is also referred to as “going public.” Now, as soon as the stock becomes public and starts getting traded on any stock exchange, the company goes public and a major change occurs in the fate of the private companies. The change is that the private company which has so gone public, now needs to keep up with and follow all the requirements and obligations same as that of like any public company.

Public companies have a large number of shareholders and they are subject to stricter regulations, which now the private company so gone public need to comply with. In India, public companies are overseen by Securities and Exchange Board of India (SEBI).

Not only is IPO a money-making move, but it also ensures greater liquidity to the company. Also conducting an IPO and entering into the open market, tends to increase the company’s ratings as now it is able to gather greater finances, which it may utilize in undertaking new ventures or simply expanding the business; and it becomes subject to greater scrutiny of its statements. This raises its goodwill and attracts more investors. Another positive impact of going public is that stocks can be issued as a part of the deal in case of various mergers and acquisitions.

But conducting an IPO is not an overnight job. It requires months of planning; planning about the stock exchange on which it is likely to get itself listed, the price of the IPO stock and the date for conducting the IPO. Companies hire some investment bank who act as underwriters and work on it while coordinating with the company and thus formulate the plans and strategies on its execution.

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