Initial Public Offering Definition and Procedure
Initial Public Offering Definition – “It is the process of going public for the first time by selling the stocks to the general public”
When for the first time companies approach the general public for raising the funds and share the ownership with them is known as initial public offering or IPO. In IPO, the equity share capital is issued by the companies. Any company whether a new or an old company can go for IPO. However, according to Companies Act 2013, it is important that company has completed 3 years from the date of commencement.
General public subscribe for the shares and in return they have to pay the money to the company. So public get the shares and the company get the money. Public who are allotted the shares are known as shareholders. After allotment of the shares the general public also have a share of ownership in the company. However, their ownership restrict to the number of shares they own.
Advantages of IPO
The biggest advantage of Initial public offering for the company is that, they are able to secure massive amount of funds. Secondly it also tells about the confidence of investors or public in that company. Huge subscription in IPO is the pass out results for the hard work of the employees of the company.
Though company promote its IPO still the information does not circulate to each and everyone. So an investor who knows about it can benefit himself from buying the shares. In addition to this, the IPO shares price often get skyrocketed.
Disadvantages of IPO
IPO is a very hectic process as it involves a very lengthy procedure plus appointment of investment bankers. All these tasks are time consuming as well as expensive.
Secondly, going public results in diluting the ownership. So the control of the existing owners reduces. A company that comes with IPO, fist has to list itself in the countries stock exchanges. Hence it is under the strict scrutiny of the regulator.
In order to understand initial public offering definition more clearly, let’s discuss the IPO procedure –
Step 1 – Prepare Registration Statement
Any company which is thinking of coming up with an IPO has to submit a registration statement to the SEBI which consist of financial reports and business plans of the company. SEBI scrutinize each ad every document.
Step 2 – Prepare the Prospectus
Till the approval has not received from the SEBI, company in the meantime should prepare a prospectus. The prospectus consists of the financial stats, future plans and price band of the share.
Step 3 – Promotion of IPO
In this step company contact underwriters, private buyers and displays advertisement for the general public. This is done to aware the interested investors about the IPO.
Step 4 – SEBI Approval of going ahead
Once the Securities and Exchange Board of India approves the IPO, company fix the date and select a stock exchange where it will list its stock.
Step 5 – Deciding on Price Band and number of share issue
Company along with the underwriters decide the final price range for the share. In addition to this, number of share issue is also decided in this step.
Step 6 – Shares Available for Subscription on the fixed date
On the fixed date which is mention in the prospectus, share of the company are made available for the public. The period of subscription lasts for maximum for 5 days as per the guidelines of SEBI.
Step 7 – Determination of Share price and allotment
Once the subscription period ends, company, investment bankers and underwriters have a meeting in which they decide the price of the shares. This is determine on the basis of bid amount and the demand. Then share are allotted.