What is an IPO?

Initial Public Offering (IPO)

What is an IPO?

Initial Public Offering (IPO) is the process of offering shares of a private company to the public for the very first time, if there is a second round of funding then it is called as Further Public Offering or Follow-up Public Offering (FPO).

Basically, after an IPO a private company with a limited number of shareholders like founders, angel investors, friends become a public company with lakhs of shareholders.

Why does a company issue an IPO?

There are many reasons behind a company issuing an IPO, here are some reasons:

1. The most common and primary objective of an IPO, that is to raise capital for business expansion.

2. To raise money for their working capital, working capital means the money required for day to day working of a company.

3. If a company is listed on a stock exchange, it increases the credibility of a company as there is the transparency of financial data because they have to report it to SEBI periodically.

4. Another use of IPO money is to invest in similar other businesses. Using IPO money for diversification is a common strategy for many companies.

5. Many companies that plan to go public have high debt loads. Therefore many companies look to reduce their debt levels by using the IPO money.

What is an Underwriting Firm?

Underwriting Firm typically is an investment bank, when the underwriting firm takes up the job they put the money to fund the IPO, essentially buying the shares before they are listed anywhere. 

The firm works with the company to determine the offering price, number of shares, type of security and the optimum time to bring the company to the public market.

The underwriter's goal is to sell the shares to the public for more than it paid to the company.

Drawbacks of Going Public

1. The issuance of public equity is one of the most expensive forms of funding. The preparation of launching an IPO is an expensive affair, there are underwriters commissions, legal and accounting fees.

2. The company has to reveal all the sensitive information. It has to disclose its strategies, finances, contacts and key projects to the public.

3. Control of the management as well as the management positions can be taken away from the existing management if an investor or group of investors obtain majority control. Which means you could get fired from the company that you founded (scary, isn't it?).

4. There is an increased risk of legal or regulatory issues.

The Dutch East India Company was the world's first company that held its IPO in August 1602.

We hope this article could give answers to all the questions that you had in mind about IPO. But still, if you have any doubt, feel free to ask your question in the comments section below or you can also mail us, we will try to give answers to questions as soon as possible.

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