Initial Public Offerings (IPOs) have taken Indian investors by storm in recent times. Take the year 2021 for instance. As per a report by E&Y, 72 IPOs were launched in India between January and September, which raised a whopping $330.66 billion. Further, 35 IPOs are currently in the pipeline for this year, including Nykaa, Mobikwik, Aditya Birla AMC and the famed LIC.
But why is there an IPO frenzy in the market with startups, companies of scale, and many medium-sized enterprises itching to list on the stock exchange?
The answer is simple. IPOs are the way for unlisted or privately traded companies to raise funds from the open market.
An Initial Public Offering or IPO is the first issue of shares by a private company. When a company decides to go public, it offers shares at a pre-determined price/price-band through the IPO.
Investors get an opportunity to become shareholders in the company and earn dividends if the company profits as well as capital returns if the demand for the shares of the said company increases. However, why do companies go public?
Every private company has a choice between staying private or going public. The Securities and Exchanges Board of India has laid down certain requirements that it needs to fulfill before launching an IPO which includes disclosing its financial records to the public. So, what are the advantages of going public? Are there any disadvantages too? How do investors benefit? Let’s find out.
Listing of securities or shares on the stock market or stock exchange is a process where the shares of a company become available to the public. The company gets listed on the stock exchange from where investors can buy and sell the shares.
Companies can list themselves in the stock market by issuing an IPO. Companies have to comply with SEBI (the market regulator) norms before applying for IPO. Post IPO approval, interested investors, both retail and institutional, subscribe to the IPO and invest in the shares.
It is important to remember that there is a limited volume of shares and not every investor who applies for the IPO is allotted shares. The allotment is done via a random process to ensure there is no bias in choosing the beneficiaries. After the shares are allotted to the investors, they are listed on the stock exchange.
There are many reasons behind a company’s decision to go public. Here are some advantages that a private company can derive by launching an IPO.
The primary goal of listing is to raise funds. The company can issue fresh share capital to raise funds for growth and expansion. When the shares are subscribed, there is an inflow of considerable funds from the market which gives the company the means to meet a sizable part of its financial needs. The funds can also be used to reduce the debt burden of the company. Thus, listing of securities allows companies to tap into investor funds that can be used for business expansion purposes.
The shares of a lot of private companies are held by several stakeholders like the company’s promoters or private investors. If such investors want to liquidate their stake partially or completely, listing on the stock exchange can give them a solution. The existing investors of the company can offer their shares to the public through an Offer for Sale (OFS) and sell off their shares to the public. Thus, through listing, existing shareholders can opt for an exit route.
When the shares of a company are listed on the stock exchange, they can be easily traded. The stock exchange is a hotbed of buying and selling of securities and listing allows the company’s shares to participate in their trading frenzy. The shares, thus, become easily marketable and liquid which motivates investors to own a stake in the company.
When the company is listed, it has to comply with the rules and regulations of the market regulator, SEBI. It keeps a tight control over the company’s financial disclosures, trading activities and corporate practices. There is little room for malpractice or fraud. This boosts the confidence of the company’s stakeholders in its operations and management.
Listing of securities gives companies the necessary funds with which they can take over smaller companies in the same business for advanced growth. The huge volume of funding also allows expansion of the company which directly impacts its profitability.
When a company’s shares are listed, the company can use its stocks to attract talented employees through the offer of ESOPs (Employee Stock Ownership Plans). This reduces the monetary compensation and retention cost for an employee and increases the chances of recruiting suitable talent.
Another advantage of listing is that it creates brand awareness. How many companies did you know before you heard of their IPOs?
Through listing, companies can get the attention of investors and analysts who study its fundamental and technical aspects. This creates a public profile for the company and can also play a crucial role in enhancing its goodwill and reputation in the market.
Listing of securities also makes companies competitive as their share prices reflect their market perception. If the company performs well, its shares would be in demand which would boost the share prices. This would also help the company to raise its market capitalisation and become a reputed name in the industry.
But there are a few downsides of listing for a company.
When a company decides to go public, it’s not all rainbows and unicorns. Here are some disadvantages to going public:
Launching an IPO involves a lot of costs including underwriting charges, legal fees, accounting costs, registration fees, advertising costs, etc. The company also needs to hire manpower specialized in the IPO process.
In a private company, the shareholders have autonomous control over the business and its operations. However, once the company goes public, this control is lost. While most companies ensure that they keep the majority shareholding in the company, the minority shareholders can influence the decision-making process.
When a company goes public, its compliance requirements increase. From conducting audits regularly to publishing financial reports every quarter, the company needs to ensure that it meets all the audit requirements mandated by SEBI.
This means that the company needs to hire specialists regularly and absorb the increased costs too.
While listing on the stock exchange is highly advantageous for a company, retail investors also benefit immensely when companies list. Listing of securities allows individuals to invest in businesses with potential for wealth creation.
So, the next time you eagerly await for an IPO, know the reasons behind it. While companies can enjoy the benefits of listing, you can also benefit when the company’s shares yield returns on your investments.