Initial Public Offering (IPO)

Why in news ?

IPO wave 25 and counting: 2025 set for record number of start-up IPOs.

• The new year is poised to bring a significant boost to start-up public listings, with nearly 25 companies preparing to hit the public markets which is nearly double the number of new-age tech IPOs compared with 2024.

What is an IPO ?

• It is a process by which a privately held company, or a company owned by the government such as LIC, raises funds by offering shares to the public or to new investors.
  • Following the IPO, the company is listed on the stock exchange.
  • Stock exchange is an organized market for the sale and purchase of securities such as shares, stocks, and bonds.
  • A listed company can raise share capital for growth and expansion in the future through a follow-on public offering or FPO.
• While coming up with an IPO, the company has to file its offer document with the market regulator Securities and Exchange Board of India (SEBI).
  • The offer document contains all relevant information about the company, its promoters, its projects, financial details, the object of raising the money, terms of the issue, etc.
  • SEBI is a statutory body established in 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.

How does IPO works ?

• Before an IPO a company is a private entity not subject to trade in a stock market.
• The private company at first consists of a small number of shareholders like the founders, family and some professional investors
• When the company reaches a stage in its growth where it believes it can stand the rigorous regulations of a financial authority (In India’s case the SEBI), it will begin to advertise its interest in going public, as in being listed in a stock exchange.
• The steps of issuing an IPO can be condensed into the following:
  • Underwriters present proposals and valuations discussing their services, the best type of security to issue, offering price, amount of shares, and estimated time frame for the market offering.
  • The company chooses its underwriters and formally agrees to underwriting terms through an underwriting agreement.
  • Form a board of directors.
  • Ensure processes for reporting auditable financial and accounting information every quarter.
  • The company issues its shares on an IPO date.
  • Some post-IPO provisions may be instituted.
• An IPO is a crucial step for a rising company as it is a gateway to raise additional fundings.
• This allows the company to grow beyond its initial setup and additionally leads to better transparency and credibility that can be a factor in attracting new investors and when seeking to borrow more funds in the future.
• An initial public offering of a company is priced to underwrite due diligence.
• When a company is listed publicly, the previous shares that were privately owned would be publicly traded and the existing private shareholder’s shares would be equal to public shares.

Who is allowed to invest in an IPO ?

• Qualified Institutional Buyers(QIBs) is a category of investors that includes Foreign Portfolio Investors (FPIs), mutual funds, commercial banks, insurance companies, pension funds, etc.
  • QIBs are those institutional investors who are generally perceived to possess expertise and the financial capacities to evaluate and invest in the capital markets.
• All individuals who invest up to Rs 2 lakh in an issue are classified as retail investors.
• Retail investors investing above Rs 2 lakh are classified as high net worth individuals.

Which Companies can come out with an IPO ?

• In order to protect investors, SEBI has laid down rules that require companies to meet certain criteria before they can go to the public to raise funds.
• Among other conditions, the company must have net tangible assets of at least Rs 3 crore, and net worth of Rs 1 crore in each of the preceding three full years, and it must have a minimum average pre-tax profit of Rs 15 crore in at least three of the immediately preceding five years.

What are the advantages of IPO ?

• Increasing and diversifying equity base
• Cheaper avenues of raising capital
• More exposure, prestige and enhanced public image
• Ability to attract and hire better employees and the management to oversee them through liquidity participation
• To enable acquisitions
• Creating multiple financing opportunity through  equity, convertible debt etc.

What are the drawbacks of IPO?

• Rise in marketing and accounting costs that will munt as time goes on.
• More effort and attention is required of the management to ensure an IPO goes smoothly.
• Chances of additional funding might not be acquired in case the company does not perform well.
• Public disclosure of information might be exploited by competitors or even customers.
• The initial shareholders may lose independence as new ones will come in through the ability to buy new shares.
• The company will be exposed to risk of litigation, private securities and other forms of derivative actions.