An IPO-a step towards enhanced ‘Corporate Governance’

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What is Initial Public Offering (IPO) & How It WorksGoing public is certainly a very important milestone in a company’s life. An initial public offering (IPO) happens only once in a lifetime during a Company’s journey. This article discusses What is Initial Public Offering (IPO) & How It Works, and the Benefits & Disadvantages of IPO Steps in an IPO.

Table of Contents

Overview of IPO

An initial public offering (IPO) refers to the process of first offering shares of a private corporation to the public in a new issue of stock. An IPO allows a company to raise equity capital from public investors. Going private to a public company can be an important time for private investors to fully realize the gains on their investment, as it typically involves an equity premium for existing private investors. It also allows public investors to make the offering.

The IPO process involves certain changes in business processes that impact a large group of shareholders because they have acquired ownership in the company and management has more responsibility to the stakeholder group, which consists of shareholders in general, regulators, and other groups of people who are directly or indirectly affected by the Company’s activities. All this requires adherence to ethical and sound business practices to serve society sustainably. The said role is enforced by the supervisory authority of the regulator, the Securities and Exchange Board of India (Board) by making legislative regulations to protect the interests of investors, investing through various mechanisms that corporations seek for raising finance and one of the ways is to go public by acquiring the statute of the listed company.

Benefits of IPO 

  • Ways of Raising Funds 
  • Better Brand Image 
  • Higher Company Valuation 
  • Managing Shareholder Value 
  • Talent Acquisition and Management

Disadvantages of IPO 

  • Sharing and disclosure of sensitive financial and business information 
  • Higher compliance costs 
  • Stricter enforcement mechanism 
  • A drastic change in company structure 
  • Time-consuming

Steps in an Initial Public Offering (IPO)

  • The first step in an initial public offering is to hire an investment bank to do the IPO. Investment banks can either work together with one to take the lead, or one bank can work independently.
  • Next, everyone involved in the IPO—the management team, auditors, accountants, underwriting banks, lawyers, and Securities and Exchange Commission (SEC) experts—will attend a meeting to discuss the offer and determine the timing of the filing. Similar meetings occur throughout the underwriting process.
  • After the meeting, company due diligence is required to ensure that the registration statements are correct. Tasks include market, legal, and IP due diligence, financing, and tax due diligence.
  • The final result of the due diligence is the S-1 Registration Statement. Information in the report includes historical financial statements, key data, company overview, risk factors, and more.
  • A pre-IPO analyst meeting is held after the filing of the S-1 registration statement to educate bankers and analysts about the company. Bankers and analysts are also informed on how to sell the company to investors. A preliminary prospectus may also be drawn up.
  • Pre-marketing is done to find out whether institutional investors like the sector and the company and the price they are likely to be willing to pay for the stock. In conjunction with internal valuation, banks set a price range for the offer. The S-1 registration statement is supplemented with a price range.
  • After the preparation for the IPO is complete and the S-1 registration statement is completed, the management team travels around to meet with investors and take the company to market. It is a very important process because it determines the orders for the number of shares from investors and the price they are willing to pay. The price range may be further adjusted.
  • The management team will meet with the investment banks to decide on the final deal price based on the orders. In case of a large number of orders (oversubscribed), the company will price the shares higher.
  • Once the IPO is priced, investment banks allocate shares to investors and the shares begin trading on the market for the public to buy and sell.

Investing in an IPO

When a company decides to raise money through an IPO, only after careful consideration and analysis will that particular exit strategy maximize returns to early investors and raise the most capital for the business. Therefore, when the IPO decision is reached, future growth prospects are likely to be high and many public investors will line up to get some shares for the first time. IPOs are usually discounted to ensure sales, which makes them even more attractive, especially when they generate many buyers from the primary issue.

Initially, an IPO is usually priced by the underwriters through their pre-market process. At its core, the IPO price is based on valuing the company using fundamental techniques. The most common technique used is discounted cash flow, which is the net present value of a company’s expected future cash flows.

It can be quite difficult to analyze the fundamentals and technical aspects of an IPO issue. Investors will be watching news headlines, but the primary source of information should be the prospectus, which is available once the company files its S-1 filing. The prospectus has useful information. Investors should pay particular attention to the management team and its commentary, as well as the quality of the underwriters and the specifics of the deal. Successful IPOs will usually be backed by large investment banks who can promote the new issue well.

Overall, the road to an IPO is very long. Therefore, public investors can build interest along the way to develop headlines and other information to help supplement their evaluation of the best and potential bid price.

The pre-IPO process typically involves solicitation from large private accredited investors and institutional investors who significantly influence opening day IPO trading. Investors from the public do not get involved until the day of the last offer. All investors can participate, but individual investors must specifically have access to trade. The most common way for an individual investor to acquire shares is to have an account with a brokerage platform that has received the allocation itself and wants to share it with its clients.

Is buying an IPO a good idea?

Buying an IPO can be a good idea. If you get in on the ground floor of a stock with high growth potential, you may reap the rewards at some point in the future as the stock appreciates over time. This would be the case, for example, if an investor were to buy the IPO of Apple or Netflix. That being said, there is also the downside that the IPO is overvalued and the stock doesn’t appreciate at all and even depreciates from the IPO price.

Startup RegistrationFinal words

Carelessness and ignoring the requirements of Corporate Governance can lead to IPO failures and many opportunities for success are lost. Since the offer documents are designed by investors as a means of communicating with investors without meeting company representatives in person. Thus, the position of Corporate Governance must be positive to have a positive spin-off effect on investors’ profits and better valuation of companies in the stock market. Finally, an IPO proposal requires companies to thoroughly and rigorously think through their Corporate Governance arrangements to avoid any negative consequences of such failures.

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