What are the company IPO and it’s challenges? Let’s Discuss
Startups are booming these days. Along with big companies, small and medium enterprises are also issuing IPOs. The main objective of which is to raise capital and expand the enterprise. In the process of IPO, a private limited company becomes a public company by issuing shares.
There are many challenges and many opportunities in this sequence. In this article, we will try to understand IPO as well as understand its various other dimensions.
Table of content-
1. What is an IPO?
2. What is the purpose of issuing an IPO?
3. What are the types of IPOs?
4. What is Fixed Price IPO?
5. What is Book Building IPO?
6. What arrangements are appropriate to make before issuing IPO of any company?
7. What is the process of bringing an IPO?
8. How many challenges does a company face when it comes to IPO?
9. What are the investors’ challenges for investing in IPO?
10. What are the precautions to be taken before investing in IPO?
11. Conclusion
1. What is an IPO?
IPO means Initial Public Offering. In general, when a company issues its common stock or shares to the public for the first time, it is called an IPO. This is the process of a private company becoming a public company. IPOs are issued by limited companies to get listed on the stock exchange.
2. What is the purpose of issuing an IPO?
The main purpose of issuing an IPO by any company is to raise capital. In order to implement the future plans of the company, in addition to the payment of the company’s debt, other necessary expenses can be met. By the availability of resources through IPO, arrangements are made for the smooth operation of the company. Also, another major objective of issuing an IPO is to enrich the former investors. The company gets listed on the stock market as soon as the IPO is issued, which increases the reputation of the company.
3. What are the types of IPOs?
There are two types of IPO, Fixed Price IPO and Book Building IPO. The lowest share price is known as the floor price and the highest stock price is known as the cap price.
4. What is Fixed Price IPO?
Fixed price IPO is also known as issue price, which is set by some companies for the initial sale of their shares. If investors participate in this IPO
They have to pay the full cost of the shares at the time of applying.
5. What is Book Building IPO?
In book building IPO, a 20% price band on the shares is provided to the investors by the company initiating the IPO. Interested investors place bids on the shares before the final price is fixed. Here the investors have to specify the number of shares they wish to buy and the amount they are willing to pay per share.
6. What arrangements are appropriate to make before issuing IPO of any company?
A. It is essential for the company to understand the sentiments of the investors.
B. Attractive picture of the company is essential for all the proposed stakeholders.
C. All incremental compliance requirements require due diligence and proper road map drafting.
D. New responsibilities and restrictions require proper evaluation.
E. Management should be alert to minimize the impact of adverse events on the share price of the public company.
7. What is the process of bringing an IPO?
A company bringing an IPO in India has to apply to the Securities and Exchange Board of India. Thereafter they have to comply with the necessary conditions to be listed on the National Stock Exchange and Bombay Stock Exchange. In such a situation, only those companies can bring IPO whose minimum paid-up capital is Rs.10 crore.
There are many other conditions that have to be complied with. When a company goes for an IPO, the appointment of a merchant banker is the primary requirement. Which prepares Draft Rate Herding Prospectus (DRHP) containing important information of the company.
After this the IPO price of the company is prepared. The shares are available for subscription for three days at this IPO price. Thereafter the IPO is either over subscribed or under subscribed. Oversubscribed IPO means that there is a demand for more shares than the number of shares the company wants to sell. Under subscribed IPO means that investors buy fewer shares than the company wants to sell.
8. How many challenges does a company face when it comes to IPO?
When any company brings an IPO, it becomes a public company from a private limited. As such, he has to face the following challenges:
A. Change in the nature of control
When any company brings an IPO, there is a change in the nature of control over its business and operations. Autonomy like a private limited company does not exist in the company after the IPO. Controls largely pass to the new public shareholders.
B. Increases Financial Processes
Financial processes increase when any company brings IPO. After bringing the IPO, the company has to clarify its financial position. The financial dimensions of the plans have to be clarified. Financial auditing etc. have to be done.
C. IPO process expensive
The process of issuing an IPO by a company is costly. Before the issuance of IPO, all the expenses have to be collected by the company from its own resources.
D. New challenges at the management level
There is an impact on the autonomy of the management after the issuance of IPO. In such a situation, the management has to pay attention to many facts while taking the decision. A lot of resources and time are spent in coordinating on many issues.
E. Regulation Challenges
Companies issuing IPOs are required to comply with various Acts and Rules, including Companies Act 2013, 2014, Securities Contracts (Regulation) 1956, 1957, Securities and Exchange Board of India Act 1992, Securities and Exchange Board of India (Issue and Disclosure of Capital). Requirements) Act, 2009 etc.
F. Need for internal restructuring
When any company brings an IPO, there is a need for restructuring of internal arrangements in terms of new obligations. In which there is definitely a huge expenditure and new personnel have to be recruited.
G. Challenging Selection of Competent Managers
Selecting competent managers before a company goes for an IPO is a very challenging task. Because there are many risks such as business risk, regulatory risk, communication and investor interaction risk etc. to be faced. Skilled and experienced managers are essential to meet these risks.
9. What are the investors’ challenges for investing in IPO?
When an IPO is brought by a company, investors want to buy the shares of that company. In this sequence they face the following challenges:
A. Complete information about the company is not available
B. Actual profit is overstated
C. Estimating the value of IPO is very difficult
D. Listed price is not guaranteed
E. Broken broker scenario occurs.
10. What are the precautions to be taken before investing in IPO?
A. Cautious observation of DRHP
Draft Red Herring Prospect (DRHP) of any company reveals the true nature of the company. It contains important information about the business, assets, liabilities etc. Therefore, it is beneficial for the investor to read and understand DRHP thoroughly.
B. How is the capital being used?
Before investing, the investor should see how and where the company is using the funds raised? Caution is warranted if the company only indicates repayment of debt. If the company appears to be investing in a good plan, then it is a good investment.
C. Information about the promoters of the company
All the decisions of the company are taken by the promoter and the top management. Therefore, it is advisable to get information about the promoters and the managerial team.
D. Information about the company’s business
It is beneficial for the investor to evaluate the reach, geographical spread, future plans, expected profit, etc., of the company’s products in whose IPO you are going to invest.
E. recognize the risk
Before investing in the IPO of any company, it is better for the investor to understand the various risk patterns of the company.
11. Conclusion:
IPOs are issued by many companies where some IPOs perform extremely well and some disappoint. The process of IPO issuance also seems to demand utmost care and caution. Adequate homework at the company level and adequate analysis of the investor before investing in an IPO is an essential factor before issuing an IPO. At the same time, it is also true that the IPO issuance process is also the lifeblood of the corporate world.
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