NEW DELHI: Initial public offering or IPO is described as the process where a private company declares itself public by selling off its stocks in the general public. Any company, irrespective of the number of years from its time of establishment, its size and type of business it deals in can go ahead and get itself listed in the exchange to go public.
A company can raise equity capital with initial public offering, by issuing new shares to the public or the existing shareholders can sell off their shares to other people without raising any fresh capital.
The company that sells its shares are known as an ‘issuer’ and does so with the help of investment banks present in the market. After an initial public offering, the company’s shares are traded in an open market. Any company that decides to sell its shares, aims to raise money for the company, which it can further use to grow and expand their businesses.
How does an IPO work?
In case a private company requires capital that is way beyond its individual ability to generate through regular operations there are a few alternatives that the management can take up to work out that capital.
Popular methods to do so include private investment, taking debt or a public investment through an IPO.
The process of IPO starts when the firm hires an investment bank or banks, to take care of the IPO. The company may also choose to sell its shares on its own as well but, that can be taxing.
Banks handover bids to companies that have decided to go public on the amount of money the firm will make in the IPO and what the bank will earn. This process of an investment bank taking care of the IPO is called underwriting.
When an investment bank is hired to do so, the company and investment bank talk about how much money they think they aim to raise from the IPO, type of securities to be issued and all other related-details are mentioned in the underwriting agreement.
After the company and investment bank come to terms with the underwriting deal, the bank presents a registration statement that has to be filed with the Securities and Exchange Commission (SEC).
This statement contains all the detailed information about the offering and the particular company, including management background, any legal problems, financial statements, who owned any stock before the company goes public and so on.
The SEC investigates the company and ensures that all the information submitted to it is correct and all relevant financial data has been disclosed.
If everything is approved, the SEC works with the company to set a date to post the IPO. After the SEC approval, the underwriter must put together a prospectus, including all financial information on the company that’s doing the IPO.
Source: Initial Public Offering Search Results