To date, nearly 25 companies have launched their IPO in 2021. Some of the most notable names are Barbeque Nation, Indian Railway Finance Corporation (IRFC), and Indigo Paints. The latest add on to this growing list is the popular food delivery startup and aggregator, Zomato. Within a record time of 75 minutes, its listing shares to raise Rs. 9,375 crores were fully subscribed.
However, why is an IPO launched?
Initial Public Offering or an IPO is primarily launched to further finance a company, post its initial fundraising. Pre-IPO, a company is privately held with a few owners who have equity in the company. However, the IPO allows anyone from the public to invest in the company and own an equity percentage in it.
Pros of launching an IPO
For the company, an IPO is a great way to raise lots of money at one shot. If it is looking for projects in the near future and needs funds for them, an IPO will provide that. Moreover, the IPO allows the company to come under the public eye at all times. Of course, there is a pro and a con as well. However, as long as all publicity is good publicity, the company will be under constant checks and tracking, not only by SEBI (Securities and Exchange Board of India) but by its investors!
A Capital Markets Professional at a leading private bank says, “An IPO is the preferred way for a company to raise capital, which prefers equity over debt. A publicly owned company is more transparent and open for public investment. Raising equity capital has its own advantages over debt capital. However, a publicly listed company is open to the volatility of the market moves, independent audit, and public perception. This may not necessarily be desirable for a specific set of firms.”
An IPO also allows existing stakeholders to multiply their capital or to make an exit when the IPO is being launched. For instance, Info Edge, the parent company of Naukri.com was one of the first institutional investors in Zomato, with a capital of nearly Rs. 4.7 crores. Now, it is looking to sell (offer for sale) 375 crores worth of its equity.
For the company, an IPO is also a positive because the capital that it raises through this method does not have any interest rates. It is the company’s money then which it can use for its beneficial purposes. However, it is answerable to its investors and shareholders instead.
Cons of launching an IPO
Once a company is listed on the stock exchange, it is also its apparent duty to make more profits to give to the shareholders. But, in this process, sometimes companies choose scrupulous methods to do this which may not benefit it in the long run. IPOs are also a costly affair. There are added expenditures like underwriters’ and audit fees. This depends on the risk profile and the size of the company. The audit fee is an annual fee needed to list the company on the stock exchange.
Moreover, a company may have to disclose more information after the IPO, including sensitive financials that are previously known only to the private equity owners in the company. There will be additional regulatory disclosure. One of the most impacting cons is also that one loses control over the company. Since the public is becoming a stakeholder in the company, someone has to let go of ownership for these new stakeholders to come in. Therefore, there is a potential loss of ownership.
Lastly, initial public offerings are costly. Aside from the ongoing costs of public firm regulatory compliance, the IPO transaction process is expensive.
In a nutshell, an IPO is a great way for a company to fundraise money for its new ventures without losing out on much. Moreover, usually more IPOs in an economy signal a positive impact on it.