Why does a company offer an IPO?

Last Updated: 12 Feb 2024

IPO is the latest buzzword in the finance domain. Many companies are going public as a way to increase funding and also as a lucrative way for people to double their investment. Almost every professional investor believes that IPOs can be an ideal first step for an investor to realize significant profits in just a week, given the company is fundamentally strong and preferred by investors. However, why do companies offer an IPO

What is an IPO, and what does going public mean?

An IPO or Initial Public Offering implies the process where any private company becomes publicly listed on stock exchanges. When a company announces its IPO, it means that instead of its shares being held by a minuscule number of private people, the shares will now be offered to the public for the first time. This, in turn, will allow the company’s shares to be freely traded in the exchanges. After the IPO opens, companies offering IPO become publicly listed companies.

However, before qualifying for an IPO, the company needs to register with the Securities and Exchange Board of India (SEBI) and appoint underwriters to assist with the process of selling the shares. After SEBI gives the go-ahead, the IPO is open for Individual investors. Furthermore, after the closure of the IPO issue, the shares are listed on National Stock Exchange and the Bombay Stock Exchange, along with the company becoming publicly listed.

Why does a company decide to go public?

Going public is one of the most important aspects of a company’s quest to expand and become more profitable over time. As every operation of a company needs capital, the best way to raise funds is through an IPO. Furthermore, a company can seek the IPO route for the following reasons:

• To infuse fresh equity capital.
• To facilitate the trading of its assets.
• To raise capital for various organizational requirements.
• To monetize the investment of its private stakeholders.

Types of Initial Public Offering

There are two types of IPOs:

1. Fixed Price Offering: Here, the company announces the full price of its IPO beforehand. It means investors taking part in the fixed price offering IPO have to pay the full amount while making applications.
2. Book Building Offering: Here, the company offers its stock price at a 20% band and asks the investors to place their bids for deciding the final price of its stocks. The investors, in turn, are required to specify the amount that they are willing to pay along with the number of shares they want to purchase. The lowest bid is the Floor Price, while the highest bidding price is the Cap Price.

Advantages of going public

Some of the advantages of issuing an IPO include:

• Funding operations: IPOs allow companies to raise quick capital by selling their shares. The general public buys the shares in ‘Lots’, and if shares are allotted, the money goes to the company. The company can use the raised amount to pay off debt fund operational activities, pay for new infrastructure, or cover the cost of expanding the company.
• Liquidity for existing shareholders: IPO provides a way out for the existing shareholders/investors that have invested in the company to see it reach the current point. If they are sure that the company is doing good and will be preferred by the general public, they can offer their shares in the IPO and make profits after listing.
• Establishes goodwill: A privately held company can engage in illicit activities without anyone’s knowledge. However, a company brings better goodwill after it goes public as people can ensure SEBI will monitor the financial data and penalize the company if there are any discrepancies.
• Improved Marketing: Companies offering IPO can ensure better market visibility as the general public that has not heard about the company laters hears and reads about the issue and the company. If the company has high potential and does good, people tend to buy its products and services after the IPO.

How to invest in an IPO?

Investing in an IPO requires you to open a demat account It converts your physical shares into electronic format. With a Demat account, you can hold a wide variety of investments such as bonds, equity shares, government securities, mutual funds, and exchange-traded funds.

You can follow the process below to open a free demat account with zero annual maintenance charges with IIFL through these simple steps:

1. Visit www.indiainfoline.com or the IIFL Online trading app. Click on open a trading account» Enter Basic details.
2. You will receive a One-Time Password (OTP) on your mobile number.
3. You will receive a link on your registered email id. You need to enter the OTP received on your registered email id.
4. After verifying the OTP, you need to fill out the online Account Opening Form.
5. Your Relationship Manager will then contact you for the necessary documentation.
6. Once the documentation process is completed, and the forms are received at HO, the account will be opened within 24 hours.

How to apply for an IPO through IIFL’s free Demat account?

The first step for applying for an IPO begins with visiting the IIFL website or the IIFL Markets app and logging in to your account. Once you are logged in, navigate to the ‘IPO Section’ and choose the company’s IPO to want to apply and follow the below steps:

• Initiate Application: You can apply to the issue through an offline/online process. If you are doing it online through IIFL’s website or the IIFL Markets app, it will be done through your UPI address. You need to ensure that your account has enough funds to be reserved by the depository.
• Allotment: This happens behind closed doors and could go any way, depending on the number of bids and the validity of bids submitted. It is important to note that not all the applicants get what they had requested as demand tends to outstrip supply by a vast margin.
• Approval: In about seven days, the registrar of the IPO finishes and confirms allotment of the shares to successful bidders. Applicants can check the IPO allotment status via the registrar’s website. You can also check the NSE or BSE websites for the same. You will need the PAN and DPID/Client ID number or the bid application number for the IPO allotment status check.

How does Investing in IPO benefit investors?

• Ideal entry point: IPOs can provide investors with significant returns on their investments in a bull market. Investors who are looking to invest for the short term or want to increase their capital for further investment should invest in IPOs for quick and profitable returns.
• Early advantage: Good companies open at a premium and go on to a price that is always higher than their IPO price. IPO investing would mean that they get an early investor advantage as others can’t buy the stocks at the IPO price.

Conclusion

Now that you know the answer to why companies offer an IPO, you can dive into the investing world and open a Demat cum trading account with IIFL. IPOs are a great way to let you multiply your investments. However, you should seek the help and assistance of IIFL’s financial experts before you start applying to IPOs.

Frequently Asked Questions

Do companies list on stock exchanges without an IPO?

Yes, if they don’t want to list through an IPO, they can try “direct listing”. However, a company can only directly list to a specific exchange if its shares are already listed on a different exchange.

How does public offering work?

It works on the same principle of buying and selling: a privately held company sells its shares and you buy them for a predetermined price. Once you get the shares, you become a part-owner of the company in proportion with the shares you hold.