What is Initial Public Offering?A private company may decide at some point to expand itself by going public and offering their shares for purchase in the public domain. This transition is a well thought out decision to attract funds and make the business more viable, to create fresh capital for the company and to monetize funds for the company’s current shareholders. This exercise is termed as an initial public offering or IPO. Read on to know more.
Steps to initiate Initial Public Offering (IPO)
- Pre-planning Since this is a major shift for any company, an IPO has to be well planned in advance. The company will need to have a solid back end team with professional expertise. If the company plans on going public at some point, the business model needs to be keeping that in mind.
- Collaborating with underwriters An underwriter acts as the mediator between the company and the share market. Underwriters are generally banks, investment companies or insurance firms who take it upon themselves to handle the financial risks of an IPO.
- Team building Even though underwriters provide their expertise, a team comprising of lawyers, accountants and security and exchange commission experts is imperative during such a time. This team ensures the smooth transition of the company and assists with the paperwork and preliminary processes.
- Laying down the rules Some of the most important decisions to be made before going public are:
Another important factor is to make sure the company’s records are clean and that they have established adequate corporate governance. A company may also provide existing shareholders the chance to bail-out with good and feasible opportunities after the IPO.
The underwriters conduct the actual sale of the shares and retain a part of the proceeds as their fee, which is called an “underwriting spread”. This syndication is very useful for companies, because underwriters take care of the legalities of IPO and share the profits with the company. A win-win for all!
The initial documentation is then readied to be filed. This undergoes changes throughout the pre-IPO process depending on the meetings and decisions that are altered. A marketing team is set up to create a buzz about the company so that the IPO reaches its maximum potential.
- Form a board of directors who will set goals for the company
- Set a date for the IPO launch. The shares are issued then and capital from the first issuance is received as cash
- Underwriters get the advantage of purchasing additional shares after the launch date
- Ensure a proper reporting process is set in place for accounting details which need to be doneevery quarter
Largest IPOsSome of the largest IPOs are:
|Company||Year of becoming IPO|
|American Insurance Group (AIG)||2006|
Overall the processes to become an IPO maybe long, but with the correct guidance, companies have flourished over time.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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