Initial Public Offer (IPO) is a process through which an unlisted Company can be listed on the stock exchange by offering its securities to the public in the primary market. The objective of an IPO may be relating to expansion of existing activities of the Company or setting up of new projects or any other object as may be specified by the Company in its offer document or just to get its existing equity shares listed by diluting the stake of existing equity shareholders through offer for sale.   

The companies going public raises funds through IPO’s for working capital, debt repayment, acquisitions, and a host of other uses. When a firm proposes a public issue or IPO, it offers forms for submission to be filled by the shareholders. Public shares can be bought for a limited period only and as per the law, any IPO should be traded openly only for minimum 3 days and maximum 21 days.   

Some major benefits accruing to the firms going for an IPO are as under :  

• Public placement of shares on a stock exchange allows the company to attract capital to fund both organic growth (modernization and upgrade of production facilities, implementation of capital-intensive projects) and acquisitive expansion. If retained earnings and debt funding are insufficient, IPO becomes one of the most realistic and convenient ways to secure the continuing growth of the business. It provides access to a massive, timeless pool of capital and boosts the investment credibility of the business.

• Formation of a public market for the company’s shares at fair price creates liquidity and provides an opportunity to sell the shares promptly with minimal transactional costs. The private owners of the company can dispose of their stakes in the business both during an IPO (this route is often taken by the minority financial investors such as venture or private capital funds) and at a later stage (this is often preferred by the majority shareholders).

• Normally, an IPO is an offer to a large number of institutional and retail investors to become shareholders of the company. The very multitude of large investors and their confidence in the liquidity of their investment in a public entity assure the current owners of a private company about achieving the maximum possible valuation of the business at the time of an IPO or afterwards.

• Listing on a recognized stock exchange means that the business will receive wide media coverage, usually a very favorable one, thus increasing the company’s visibility and recognition of its products and services. The company’s activities will also be reflected in the reports by professional financial analysts. Such public profile supports liquidity of the shares and contributes to the expansion of the business contacts. It also helps to increase confidence among the company’s business partners.

• A company having low-transparency businesses with an inadequate financial reporting after listing on a recognized stock exchange becomes a desirable and reliable partner. Banks are often ready to extend loans to public companies in larger amounts, under smaller collateral, for longer maturities and with lower interest rates. Even the largest and most prestigious banking institutions are keen to work with public companies – whose transparency and corporate governance serve as additional factors of confidence for banks and other suppliers of credit. Partners and contractors of a public company feel more confident about its financial state and organizational capabilities as compared to those of a non-transparent private business.

• Publicly available information about the share price of a public company allows development of employee motivation schemes based on partial remuneration of staff in the form of participation in the equity capital (for example, ESOP –Employee Stock Option Plan). Equity-based incentive schemes stimulate the key personnel to become more efficient in their work in order to support the company’s growth rates and profitable development, which in turn increase the operational and financial efficiency of the company and its market value.

• Conduct of various due diligences during the IPO process requires a thorough and comprehensive analysis of the company’s business model. During the IPO implementation process, certain internal changes take place, including modification of the organizational structure; selection of the key personnel and delegation of responsibilities; improvement of internal reporting and controls; as well as critical evaluation of the efficiency of the entire business. Normally, such extensive internal efforts result in significant improvements of the communication system, management and controls; they also help eliminate any previously hidden shortcomings in the internal functioning of the business.  

However, before launching its IPOs, a company must disclose all the relevant information to the public and its prospective investors. For that matter, company making a public issue of securities has to file a Draft Red Herring Prospectus (DRHP) with capital market regulator Securities and Exchange Board of India, or SEBI through an eligible merchant banker prior to the filing of prospectus with the Registrar of Companies (RoCs). The issuer company engages a Sebi registered merchant banker to prepare the offer document. Besides due diligence in preparing the offer document, the merchant banker is also responsible for ensuring legal compliance. The merchant banker facilitates the issue in reaching the prospective investors by marketing the same. The Indian regulatory framework is based on a disclosure regime. SEBI reviews the draft offer document and may issue observations with a view to ensure that adequate disclosures are made by the issuer company/merchant bankers in the offer document to enable investors to make an informed investment decision in the issue.   

DRHP provides all the necessary information an investor ought to know about the company in order to make an informed decision. It contains details about the company, its promoters, the project, financial details, objects of raising the money, terms of the issue, risks involved with investing, use of proceeds from the offering, among others. However, the document does not provide information about the price or size of the offering.  

Generally, the stock of any fundamentally sound company would go up after being listed in an exchange. Hence, as far as investors particularly retail ones are concerned, the IPO is the only place where they can get the stock at the lowest possible price. Hence if they buy stocks in an IPO, they can sell it off at a higher price and make a profit.

However, there are certain factors which need to be taken into consideration before applying for Initial Public Offerings in India. They are :  

• Promoters, their reliability and past records

• Firm producing or facilitating services

• Product offered by the firm and its potential

• Whether the firm has entered into a collaboration with technological firm

• Status of the associates

• Historical record of the firm providing the Initial Public Offerings

• Project value and various techniques of sponsoring the plan

• Productivity estimates of the project

• Risk aspects engaged in the execution of the plan

• Authority that has reviewed the plan  

Thus, IPO is an opportunity for the company as well as the investors looking for long term capital and investments. But, less than 5% of India’s household savings of around $ 300 billion are invested in stocks and mutual funds, according to India’s central bank, depriving companies of a huge pool of potential funding for investments. Indians have typically preferred to put their money in gold jewelry and real estate. Some investors moved into stocks after markets began to boom in 2005, but a collapse in prices after 2008, allegations of wrongdoing and a number of IPOs that fell sharply after listing have turned many investors off. Moreover, Individual investors remain wary of equities. India’s benchmark Sensex gained 26% in 2012, but remains near where it traded at the end of 2007, leaving many investors without gains. Indian Capital Market had traded a long way but it needs more extended participation by the investors to make stock exchange a investment trading platform rather than a speculation platform.