An Initial Public Offer (IPO) is the method by which listed companies raise funds from the market.
The money raised by an investor of the IPO is termed as ‘Equity Share Capital’ and forms a part of the Capital Structure of the company’s business. Investors are termed the equity shareholders and effectively hold a stake in the business to the amount of money invested.
What does an IPO mean? IPOs are a feature of primary markets, where money is raised directly from the market for the first time (initially).
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Equity shares are transferable instruments, and the buyers can later sell the shares to other individuals to liquidate their interest in the company. The buying and selling of shares that occurs post IPO are a part of the secondary markets.
IPOs have been a tedious affair for any company looking to raise money through the primary markets.
There are too many intermediaries involved, and the whole process takes many months to execute.
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IPOs have evolved to become procedure oriented with the course of time, as there are many steps involved in the IPO framework.
There are several reasons why there is a need for a change in mindset for a successful IPO. Some of these are as follows:
- Goal setting: By going public, a company could be looking to liquidate the investment of an invested private equity owner or a venture capitalist.
It could also raise money to decrease gearing levels of the capital structure, or to expand operations with additional capital. It is vital for a company to understand its own reason and objective for conducting an Initial Public Offering.
- Data management: The IPO process involves coordination with various third parties such as merchant bankers, underwriters, bankers to the issue, portfolio managers and debenture trustees.
This entails the creation of a vast amount of data and information, even for legal reasons. Companies must change the approach of database management to suit the higher volume of data creation.
- Compliance issues: After listing on the stock market, companies become accountable to many regulatory bodies such as the RoC (Registrar of Companies), SEBI (Securities and Exchange Board of India), RBI (Reserve Bank of India), BIS (Bureau of Indian Standards) etc.
There are industry-wise regulatory bodies as well such as- TRAI (Telecom Regulatory Authority of India), ASCI (Advertising Standards Council of India), AMFI (Association of Mutual Funds) etc.
Corporate governance issues have to be looked after by the companies going for an IPO.
- Higher accountability: Companies should be ready to face a higher level of scrutiny as compared to when they were unlisted before the IPO was undertaken.
As there is a lot of regulation pertaining to listed companies, they must be better prepared with internal controls, systems and procedures for better response to external regulation.
- Timing the IPO: It is crucial to get the timing of IPO right for your company.
This can be dependent on a variety of factors such as industry, economy, revenue level attained, current profitability, future plans for expansion, product innovation etc. Wrong timing can make an IPO run unsuccessful, even if the company had potential.
- Establish Scalability: The company conducting an IPO must have a plan of action to make the business scalable to higher levels.
Scalability can include geographical expansion, diversification to other product categories or scaling to newer industries or domains.
- Value creation: The primary goal of any business entity is to create value for the end customer through its goods and services.
By an IPO, the company must not lose sight of the target audience and the art of value creation. New product development initiatives must streamline with the overall goal and vision of the company.
- Management Information Systems: Robust internal controls, systems and procedures must be in place to manage the huge database and management information systems of the company.
Top managers must devote personal attention to the development of IT systems to take the load of additional data that comes upon listing on the stock exchange.
There is a need to change the mindset of companies heading for an IPO from a process-oriented to a goal-oriented task.
IPOs must be carefully thought through the reasons and objects behind the step.
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There is a lot of work that goes on in the background in terms of human resources, monetary resources, legal compliances and procedures.
Companies must also be acquainted with the regulations pertaining to listed companies and have in-house Compliance experts to handle regulatory requirements for the company. Additional scrutiny by the authorities is a by-product of conducting an IPO and companies need to change their mindset to become more accountable for their actions and decisions.
Apart from this, the company must focus on customer retention along with expansion for a higher level of value creation for the target customer pool.