IPO – Initial Public Offering

• Before an IPO, a company is known as a private company. An IPO is a big step for a company as it provides the company with access to raising a lot of money.

• This gives the company a greater viability to grow and expand.  This increased transparency and share listing credibility can also be a factor in helping it obtain better terms when seeking borrowed funds as well.

• When a company reaches a stage in its growth process where it believes it is mature enough for the rigors of SEC regulations along with the benefits and responsibilities to public shareholders, it will begin to advertise its interest in going public.

• Typically, this stage of growth will occur when a company has reached a private valuation of approximately $1 billion, also known as unicorn status.

​

​

​

​

​

​

​

​

​

​

Here’s how an IPO typically works:

​

1. Preparatory Stage: 

• Select Advisors: The company engages investment banks(underwriters), legal counsel, auditors, and other professionals to guide them through the IPO process.

• Due Diligence: The company conducts a thorough internal review, including financials, operations, legal matters and risk factors.

​

   2. Registration Statement:

• The company prepares a registration statement, which includes a prospectus.

• This document is submitted to the SEC (Securities and Exchange Commission) and provides detailed information about the company, its financials, operations, risks, and management.

​

  3. Pricing and Valuation:

• The underwriters (investment banks) help determine the IPO price based on demand and market conditions.

• The company aims to set a price that reflects its true value while being attractive to investors.

​

  4. Roadshow:

• The company and its underwriters conduct a roadshow, presenting the IPO to potential institutional and retail investors.

• The roadshow typically involves presentations and Q&A sessions with the company’s leadership team.

​

  5. Allotment of shares:

• The company allocates shares to institutional investors, retail investors, and other stakeholders.

• Institutional investors may receive a larger allocation of shares.

​

  6. Pricing and Listing:

• On the scheduled IPO date, the company’s shares are priced, and trading begins on the chosen stock exchange.

• The opening stock price is determined by market demand.

​

  7. Post-IPO Activities:

  After going public, the company must adhere to various regulatory requirements, including ongoing financial reporting,       annual shareholder meetings, and investor relations.

​

  8. Compliance and Reporting:

• The company must maintain compliance with the exchange’s listing requirements and fulfill SEC reporting obligations, which include quarterly and annual filings.  

• The IPO process involves a combination of financial, legal, and marketing efforts to make the shares available to the public and generate capital for the company.

​

​

​

Advantages and Disadvantages of going public:

When a company goes from private to public several things should be carefully considered. Some of the advantages and disadvantages are:

 

​

Advantages:

 

1. Access to capital:

• Public companies can raise substantial capital by selling shares to a wide range of investors, which can be used for expansion, research and development, debt reduction, or other strategic initiatives. 

• This type of capital can further be used to fund research and development (R&D), fund capital expenditure, or pay off existing debt.

 

2. Liquidity for existing shareholders:

IPOs provide an opportunity for existing shareholders (founders, early investors, employees) to monetize their investments by selling shares, thus providing liquidity.  

 

3. Enhanced Visibility:

When a company goes public, it often increases brand recognition and visibility, making it easier to attract customers, partners, and more talent to the company.

 

4. Currency for Mergers and Acquisitions:

Publicly traded shares can be used as currency in mergers and acquisitions, which can facilitate growth and diversification.

 

5. Credibility and Trust:

Publicly traded companies are subject to higher regulatory standards and transparency requirements, which can enhance credibility and trust among customers, suppliers, and partners.

 

6. Employee Incentives:

Public companies can use stock options and other equity-based compensation to attract and retain top talent.

 

7. Diversification of Ownership:

An IPO can help distribute ownership among a larger number of shareholders, which can reduce concentration risk.

​

​

Disadvantages:

​

1. Regulatory and Reporting Requirements:

Public companies are subject to extensive regulatory compliance, including financial reporting and disclosure obligations, which can be costly and time-consuming.

 

2. Loss of Control:

Founders and early investors may lose some control as ownership becomes more dispersed, and external shareholders have voting rights.

 

3. Market Volatility:

Publicly traded stocks can be subject to market fluctuations and investor sentiment, which can impact share prices and the company’s stability.

 

4. Short-Term Focus:

Public companies may face pressure to deliver short-term results to satisfy investors, which can limit long-term strategic planning.

 

5. Costs:

IPOs involve significant costs, including underwriting fees, legal and accounting fees, and ongoing compliance expenses.

 

6. Transparency:

Public companies must disclose sensitive information that competitors can access, potentially compromising confidentiality and strategic advantage.

 

7. Shareholder Expectations:

Public companies must meet shareholder expectations, which may include regular dividends or stock price appreciation, even in challenging economic conditions.

 

8. Increased Liability:

Public companies can be subject to shareholder lawsuits and regulatory investigations, which can result in financial and reputational damage.

​

​

Procedure of getting an IPO:

​

The process of getting an IPO (Initial Public Offering involves several stages, and companies typically work closely with investment banks and legal advisors to navigate through regulatory requirements.

​

1. Preliminary Assessment:

The company assess its financial readiness, market conditions, and strategic goals to determine if an IPO is the right step.

 

2 Engagement of Advisors:

The company selects a team of advisors, including investment banks (underwriters), legal counsel, auditors, and other professionals.

 

3. Due Diligence:

Conduct through due diligence internally, reviewing financials, operations, legal matters, and risk factors.

 Resolve any issues that might pose challenges during the IPO process.

 

4. Selection of Stock Exchange:

Decide on the stock exchange where the company’s shares will be listed.

 This could be a major exchange like BSE or NSE.

 

5. SEC Registration:

Prepare and submit the necessary registration statement with Securities and Exchange Commission.

 This document should include a prospectus with detailed information about the company’s financials, operations, risks and management.

 

6. Prospectus Drafting:

Work with legal counsel and underwriters to draft the prospectus, which will be provided to potential investors.

 The prospectus is a key document for information investors about the company and the offering.

 

7. Roadshow:

Conduct a roadshow, where the company’s leadership team, often accompanied by investment banks, presents the IPO to potential institutional and retail investors.

 This involves presentations, Q&A sessions, and meetings with potential investors.

​

​

​

​

​

​

​

​

​

 

8. Pricing and Allocation:

Work with underwriters to determine the IPO price based on demand and market conditions.

Allocate shares to institutional investors, retail investors, and other stakeholders.

 

9. Finalizing IPO terms:

Finalize the terms of the IPO, including the number of shares to be offered, the offer price, and the underwriting fees.

 

10. SEC Approval:

Obtain SEC (Securities and Exchange Commission) approval for the IPO.

The SEC reviews the registration statement to ensure compliance with regulatory standards.

 

11. Listing and Trading:

On the scheduled IPO date, the company’s shares are priced, and trading begins on the chosen stock exchange.

 

12. Post-IPO Activities:

Adhere to various regulatory requirements, including ongoing financial reporting, annual shareholder meeting, and investor relations.

 

13. Compliance and Reporting:

Ensure compliance with the exchange’s listing requirements and fulfil SEC reporting obligations, including quarterly and annual filings.

​

​

Safety Measures:

​

1. Due Diligence:

Conduct through due diligence on financials, operations, legal matters, risk factors to identify and address potential issues before they become obstacles during the IPO process.

 

2. Transparency and Disclosure:

Ensure transparent and accurate disclosure of information in the prospectus.

Provide investors with a clear understanding of the company’s business, risks, and financial condition.

 

3. Compliance:

Adhere to all regulatory requirements set by the SEC and other relevant authorities.

Compliance is critical for a successful IPO.

 

4. Cybersecurity Measures:

Implement robust cybersecurity measures to protect sensitive information from potential cyber threats.

This builds confidence among investors and regulatory bodies.

 

5. Internal Controls:

Strengthen internal controls to ensure the accuracy and reliability of financial reporting.

This builds confidence among investors and regulatory bodies.

​

​

​

​

​

​

​

​

 

6. Communication Plan:

Develop a comprehensive communication plan to keep stakeholders, including employees, informed about the IPO process.

Address any concerns and maintain a positive public image.

 

7. Employee Education:

Educate employees about the IPO process, their role, and any changes that may occur.

Consider implementing blackout periods for trading to prevent insider trading.

 

8. Risk Management:

Identify and manage potential risks associated with the IPO.

Implement risk mitigation strategies to minimize uncertainties.

 

9. Legal compliance:

Ensure that all legal aspects of the IPO, including contracts, agreements, and regulatory filings, comply with applicable laws and regulations.

 

10. Financial Planning:

Develop a comprehensive financial plan that considers the company’s capital needs, the use of IPO proceeds, and ongoing financial management post-IPO.

​

​

How does a company determine the market-value of its stocks?

​

It is generally determined through a process called book-building. Here is the overview of how the market value is calculated:

​

1. Book Building Process:

Book-Building process is a mechanism used to determine the offer price of the shares being issued in an IPO.

It involves assessing investor demand for the shares by allowing them to bid within a price range.

 

2. Price Discovery:

The company, with the help of lead managers or underwriters, sets a price range within which investors can bid for shares.

This range is mentioned in Red Herring Prospectus.

 

3. Bidding by Investors:

Institutional investors, retail investors, and high-net-worth individuals place bids for the shares at the specified price range.

The bids include the quantity of shares they are willing to buy at various prices within the range.

 

4. Price Band:

The difference between the floor price (the lower end of the price range) and the cap price (the upper end of the price range) is known as the “price band”.

 

5. Cut-Off Price for Retail Investors:

Retail investors have the option to bid at the cut-off price, which means they are willing to purchase shares at any price within the price band.

The final allotment is made at the discovered price.

​

​

​

​

​

​

 

​

​

 

6. Demand Aggregation:

The underwriters aggregate the demand from all investor categories and determine the demand at various price levels.

 

7. Price Determination:

The offer price is then determined based on the demand and supply dynamics at different price levels.

The final price is the price at which the total demand is equal to the number of shares offered.

 

8. Allotment:

After the price is determined, shares are allotted to investors based on their bids and the final offer price.

 

9. Market Capitalization Calculation:

Market capitalisation of the company is calculated by multiplying the final offer price per share by the total number of shares issued in the IPO.

Market Capitalization = Offer Price per Share * Total Number of Issued Share

 

10. Post-IPO Market Value:

Once the IPO is complete, and the shares are listed on the stock exchange, the market value of the company is determined by the market price of its shares in the secondary market.