Initial Public Offerings (IPO)
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Why An IPO? What are its benefits?
Companies come up with initial public offerings for various Funding and Non-Funding Purposes. The primary reason for a company going public via IPO is raising capital quickly from a large number of investors. The company utilizes the funds raised through IPO for business expansion, research & development, or to meet its working capital requirement. Listed companies always have an added advantage of being prestigious, and can also attract new talents by offering stock options.
Primary reasons for an Initial Public Offering by a Company
How does an IPO work?
There are several steps a company goes through for its IPO. They are:
- IPO is regulated by the Securities and Exchange Board of India (SEBI). In order to file for an IPO, companies must first register with SEBI. Then SEBI scrutinizes the documents submitted by the company.
- After completing all the formalities, companies fixed the number of shares to be offered along with the price or price bands at which they will offer to the public.
- Investors then subscribe to the shares of the company. Generally, IPOs are oversubscribed, which means companies receive more applications than they have offered.
- In case of oversubscription, the company offers partial allotment to its investors.
- After the shares are issued to the investors in the primary market, it gets listed in the market or stock exchange for trading.
We will elaborate on all the steps in the next unit. We will also discuss the process of filing an IPO in India.
Note: IPOs are generally underpriced with a view to maximize investor interest. This encourages investors to subscribe to the issue for listing gains or a long-term portfolio bet.