There are benefits to having an IPO other than raising capital.
When a company's stock goes public, it can attract a lot of media attention. This amounts to free advertising for the company. Also, many publishers of stock market information list and track public companies, which means going public can, get a company's name "in the books" and in front of investors and stock brokers
Issuing shares allows employees to hold stock in a company. The employees know that their share of the company will increase in value the more successful the company is. This gives employees more pride in the work they do -- they literally become part owners. This effect can extend to interested business associates, as well. Imagine that the owner of a packaging business buys stock in the bakery we mentioned above when the bakery has its IPO. The packaging business supplies plastic bags to the bakery, so the owner might be willing to give the bakery a deal on the plastic bags in hopes of helping the bakery become more successful (and increasing the value of his stock).
The last benefit to an IPO has to do with rules established by the Securities and Exchange Board of India (SEBI) that strictly regulate public companies to prevent fraud. To go public, a company has to open its accounting practices, sales figures, and marketing plans to anyone who wants to see them. This can make it easier for the company to secure certain kinds of loans and raise money from other investors.
There are several other benefits to being a public company, namely:
•Bolstering and diversifying equity base
•Enabling cheaper access to capital
•Exposure, prestige and public image
•Attracting and retaining better management and employees through liquid equity participation
•Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.
•Increased liquidity for equity holder
While undertaking an IPO a company is doing two things simultaneously:
â—ÂIt is offering shares for sale to the public
â—ÂIt is also raising capital
There is no doubt that offering securities to the investment public will help a company’s management and directors retain a large degree of control, as opposed to many other capital funding scenarios.
For example, if a private company decides to use the services of venture capitalists to raise capital, instead of going public, the VC’s (Venture Capitalists) might insist on a decision-making position, such as a seat on the board of directors. When a company decides to raise capital via the going public process of an IPO (Initial Public Offering), those unpleasant considerations are avoided by IPO companies.
No doubt the prestige related with becoming a public company has a definite appeal. The fact that it’s easier for an IPO underwriter to promote a public company is also a pertinent consideration because the funding resources available to public companies are much better than what’s available to private concerns.
Public companies have historically achieved higher recognition than private companies; hence, the public relations image and the perceived stability of being a public company is a plus. All the above considerations should come into play when you are considering the pro’s and con’s of going public via an IPO (Initial Public Offering) and we have the IPO resources to help you make this important step via IPO underwriting
The Drawbacks of an IPO
Having an IPO doesn't mean free money for the company. Otherwise, everyone would have an IPO. There are drawbacks that come with the new capital raised through an IPO.
The most obvious cost of having an IPO is the expense. It costs money to raise money. The legal fees, printing costs, and accounting fees associated with registering an IPO can run into the hundreds of thousands of dollars. On top of those costs, the rules for taking a company public are so complex that most companies have to hire experts to handle all the paperwork. And once the IPO has happened, the costs don't end. The SEBI regulations on public companies mean that the CEO of the company will either have to devote a lot of extra time to dealing with those regulations (plus the demands of profit-hungry shareholders) or hire someone else to do it.
Speaking of shareholders, they are another drawback of going public. The primary owners are no longer in a private company that can make independent decisions. The investors who purchased stocks at the IPO own a certain percentage of the business, and their demands cannot be ignored, even if they don't have a controlling interest (more than 50 percent of the shares) in the company. SEBI regulations require shareholder notification, meetings, and approval for certain business decisions. Shareholders also want to see the value of their stocks rise, so if the stock price drops or remains stagnant, the company will have to deal with unhappy part-owners. If they become unhappy enough, they may sell their stocks, which will cause the value to drop further, decreasing the overall value of the company.
Public companies are also open to public scrutiny. Quarterly financial reports, internal transactions, and balance sheets are all open to inspection. This is more of a problem for some companies than others, particularly companies who might have made illegal deals or altered financial reports
The Underwriting Process
Underwriting is the process of raising money by either debt or equity (in this case we are referring to equity). You can think of underwriters as middlemen between companies and the investing public. The biggest underwriters are Goldman Sachs, Credit Suisse, First Boston and Morgan Stanley.
When a company wants to go public, the first thing it does is hire an investment bank. The company and the investment bank will first meet to negotiate the deal. Items usually discussed include the amount of money a company will raise, the type of securities to be issued and all the details in the underwriting agreement. The deal can be structured in a variety of ways.
For example, in a firm commitment, the underwriter guarantees that a certain amount will be raised by buying the entire offer and then reselling to the public. In a best efforts agreement, however, the underwriter sells securities for the company but doesn't guarantee the amount that will be raised. Also, investment banks are hesitant to shoulder all the risk of an offering. Instead, they form a syndicate of underwriters. One underwriter leads the syndicate (lead underwriter) and the others sell a part of the issue.
Once all sides agree to a deal, the investment bank puts together a registration statement to be filed with the SEBI. This document contains information about the offering as well as company info such as financial statements, management background, any legal problems, where the money is to be used and insider holdings. The SEBI then requires a cooling off period, in which they investigate and make sure all material information has been disclosed. Once the SEBI approves the offering, a date (the effective date) is set when the stock will be offered to the public.
During the cooling off period the underwriter puts together what is known as the red herring. This is an initial prospectus containing all the information about the company except for the offer price and the effective date, which aren't known at that time. With the red herring in hand, the underwriter and company attempt to hype and build up interest for the issue.
As the effective date approaches, the underwriter and company sit down and decide on the price. This isn't an easy decision: it depends on the company, the success of the marketing & advertisement and most importantly, current market conditions. Of course, it's in both parties' interest to get as much as possible.
Finally, the securities are sold on the stock market and the money is collected from investors.
The Day of the IPO
The day before the stocks are issued, the underwriter and the company must determine a starting price for the stocks. A target price will have been set early on in the process, but IPOs are rarely stable. Obviously, the higher the price, the more money the company gets; but if the price is set too high, there won't be enough demand for the stocks, and the price will drop on the aftermarket (the open financial markets where the stock will be traded after the initial offering). The ideal stock price will keep demand just higher than supply, resulting in a stable, gradual increase in the stock's price on the aftermarket.
Who gets to buy the shares during an IPO is a complicated matter. In most cases, a typical, individual investor doesn't get access to these offerings. Instead, the underwriter gets to allocate the shares to associates, clients, and major investors of his choosing. Most of the shares (about 80 percent) will go to institutional investors, which are major brokerage firms and investment banks, and a few high-profile individual investors. The remaining shares that do make their way to small-time, individual investors are hard to obtain: Stock brokers usually only offer access to IPOs to higher volume traders, traders with no history of flipping stocks, and traders with a long-term relationship with the broker.
After the initial offering, the stocks hit the open stock market, where they begin trading at a price set by market forces. IPO stocks tend to trade at a very high volume on that first day -- that is, they change hands many times. Some IPOs can jump in price by a huge amount -- some more than 600 percent. Many IPOs do poorly, dropping in price the day of the offering. Others fluctuate, rising and then dipping again -- it all depends on the confidence the market has in the company, how strong the company is vs. the "hype" surrounding it, and what outside forces are affecting the market at the time.
After about a month, the underwriter issues a report on the IPO, which is always positive. This tends to give the stock a slight boost. After 180 days have passed, people who held shares in the company prior to its going public are allowed to sell their shares.
Types of Public Issues
• Fixed Price Issue –
ï‚§Wherein the price band of the issue is fixed.
ï‚§For e.g. Deewan Sugar Industries Limited Public Issue of 50, 00,000 equity shares of Rs 10/- each at a premium of Rs 55/- per share aggregating Rs 3250 lacs. [50 * (10+55)]
ïƒ¼Public Issue – Shares offered to the general public
ïƒ¼Private Placement – Shares are placed privately by lead manager of Investment Bank’s Syndicate. Shares are basically offered to major brokerage firms, investment banks and high-profile individual investors.
ïƒ¼Offer for Sale/Subscription - There are two main ways for a company to list new shares 1) By an offer for sale, which is a public invitation by a sponsoring intermediary such as an investment bank.
By an offer for subscription, or direct offer, which is a public invitation by the issuing company itself.
• Book Building Issue -
ï‚§Book Building is a price discovery mechanism which is undertaken to ascertain and determine the price of the security proposed to be issued by a body corporate.
ï‚§There is a price band which gives the bidder the facility to bid within a price band at different price levels.
ï‚§e.g. National Thermal Power Corporation Limited wherein the price band was fixed between Rs 52 to Rs 62/-
Category of Bidders
•Retail Individual Investor:- means an investor who applies or bids for securities of or for face value of not more than Rs 50,000/-
•Non-Qualified Institutional Buyer:- Any investor who bids for an amount above Rs 50,000 and does not fall in the QIB category e.g. HNI investors.
•Qualified Institutional Buyer(QIB) shall mean:-
a)public financial institution as defined in section 4A of the Companies Act, 1956;
b)scheduled commercial banks;
d)foreign institutional investor registered with SEBI;
e)multilateral and bilateral development financial institutions;
f)Venture capital funds registered with SEBI.
g)Foreign Venture capital investors registered with SEBI.
h)State Industrial Development Corporations.
i)insurance Companies registered with the Insurance Regulatory and Development Authority
j)provident Funds with minimum corpus of Rs. 25 crores
k)pension Funds with minimum corpus of Rs. 25 crores
Information contained in this Prospectus relative to markets for the company's products and trends in net sales, gross margin and anticipated expense levels, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect" and "intend" and other similar expressions, constitute forward-looking statements ...actual results of operations may differ materially from those contained in the forward-looking statements
"...risks for the company include, but are not limited to, an evolving and unpredictable business model and the management of growth .... There can be no assurance that the company will be successful in addressing such risks, and the failure to do so could have a material adverse effect on the company's business, prospects, financial condition and results of operations."
Key factors to be considered before investing in an IPO
•Capital structure of the company.
•Terms of the present offer.
•Outstanding litigation & defaults.
•Any published reports that forecast the future earnings.
Indian v/s Overseas Scenario
•In India the book is built directly while in the west the underwriter takes the shares on his books and then allots shares to investors.
•In India the book-building process is transparent while in US it is done confidentially.
•Abroad, the book can be opened and closed anytime. In India, the book has to be kept open for a minimum of five days; the period can be extended if price band is revised.
•In India, 50 percent of the book is reserved for high net worth and retail individuals (25 percent each), the allotment being proportional to the bid. The allotment to QIBs is discretionary and there are no reservations. Retail investors account for barely 15 percent of the issue.
•Overseas, the price band is often a soft band, in the sense the underwriter is allowed to bid at a price outside the band; in India, we have a rigid price band, though it can be revised.
•Retail investors here have to put in a cheque for the full amount, although QIBs pay no margins. Overseas, neither segment pays any margin.
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