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Business News/ Markets / How does an IPO work?
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How does an IPO work?

An initial public offering (IPO) allows a firm to list on the stock exchange and raise funds for capital investment, debt repayment and to provide an exit path for its key investors.

Initial Public Offering is the process of conversion of a privately held organisation to public organisation by issuing shares to investors. (Photo by Campaign Creators on Unsplash )Premium
Initial Public Offering is the process of conversion of a privately held organisation to public organisation by issuing shares to investors. (Photo by Campaign Creators on Unsplash )

Initial Public Offering is the process of conversion of a privately held organisation to public organisation by issuing shares to investors. In the form of an IPO, a company's equities are issued to the public for the first time. A company that offers a public issue gets listed on the stock exchange and obtains funding through an initial public offering (IPO) for debt repayment, capital expenditure and to provide an exit path for its core investors. It not only benefits the company financially, but also improves the company’s brand equity.

Private firms can obtain equity capital through IPOs by issuing new shares to the public, giving retail and institutional investors a chance to participate in the offering and to become shareholders of the company. The cash raised is then used by the firm for expansion and growth, while the investors can earn profit from their investment.

Working of an IPO

The company employs underwriters to guide them in evaluating the financial aspects of the company. They carefully examine all the factors including the assets and liabilities of the company and decide the number and the price or the price band at which the shares should be offered. Underwriters also provide their assistance in drafting the application to SEBI to seek their approval for issuance of IPOs .

The draft sent to SEBI contains all the financial information of the company including their net worth, assets , liabilities etc. The company also mentions the details on how they plan to allocate the funds collected through selling of securities in the application.

Securities and Exchange Board of India (SEBI) carefully goes through the application submitted by the company. All the contents of the application including legal and financial factors, plan of utilisation of the funds collected are examined by a group of experts. If no errors are found, the SEBI allows the company to release the draft red herring prospectus (DRHP).

The ‘red herring' prospectus is a document issued by the firm that specifies the quantity of shares and the issue price/price band to be offered in the first public offering.Following the filing of the DRHP, the firm determines the price range in which it wants to go public. It is one of the most important phases in the entire process since it determines whether the deal will succeed or fail.

The firm formally opens the window to the public and makes the shares available. Following that, investors file IPO applications indicating their desire to purchase the shares. The business assigns the shares to the investor once the subscription window closes.

The final step in the procedure is to list it on the stock exchange. The shares are eligible to be traded on a daily basis on the secondary market once they are issued to the public in the primary market.

Before a company goes public, it usually takes care of a few factors. It makes sure that the industry environment is supportive of the IPO debut, and also that the company's overall growth is promising. Furthermore, the timing of the IPO is also critical, and collision with other IPOs is avoided.

We explain here how to find a good IPO to invest in?
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We explain here how to find a good IPO to invest in?

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Published: 07 Mar 2022, 08:25 AM IST
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