IPO-procedures & reasons for listing

Knowing enough about IPO to make solid, informed choices cuts down on the fear factor. The article below describes the reasons and procedures for listing IPO

There are many procedures for listing Initial Public Offering (IPO) and normally involve one or more investment banks as ‘underwriters’. The issuer is the company offering its shares, who enters into a contract with a lead underwriter to sell its shares to the public. This is followed by the underwriter approaching investors with offers to sell these shares. In order to apply for IPOs you need to have a demat account or else your application will be rejected. IPOs are generally expansively advertised through newspapers, television commercials and on radio as well.
This is because not only is it statutorily required but also companies want utmost publicity to make sure that their issues are known to the largest section of people to gain success. The procedure and planning that goes into preparing a company to go public takes several months.

It is an extensive procedure which involves assembling a board of directors, auditing accounts for accuracy, hiring consultants and advisers, and contracting a financial printer. The procedure for IPOs cannot happen without having these professionals take center stage. The most important person in the entire IPO process is probably the underwriter who is an investment banker. They have the right distribution channels and business community contacts through which they are able to get a company's shares to the right investors. Underwriters are also involved in helping set the initial offering price for the stocks and creating interest for the stock. They further assist in creating the brochure with important details of the company so as to allure potential investors.

After the prospectus or brochure has been drafted, it is assessed by the Securities and Exchange Commission (SEC). Upon approval by the SEC an extensive promotion campaign is arranged in major cities to attract potential investors. A big IPO is generally underwritten by an association of investment banks with one lead underwriter. On the basis of the percentage of the value of the shares sold the underwriters gets a commission. The lead underwriters, who sell the largest proportions of the IPO, get the highest commissions sometime up to 8%. Typically, the lead underwriter in the primary selling group is also the lead bank among the other selling groups.

Due to the large number of legalities involved IPOs usually hire one or more law firms with major practices in securities law. The procedure includes issuing new shares for raising new capital, and secondary sale of existing shares. Initial Public offerings are mainly sold to institutional investors, although some shares are also sold to the retail investors of the underwriter. In the process of selling shares of IPOs a broker is paid through a sales credit and not a commission.


Before discussing the reasons for listing by an IPO, let us first understand the basic concept of an IPO. Initial Public Offering or IPO is defined as the first sale of stock by a private company to the public. When a new company or an existing company but without any shares listed on the stock exchange invites the public to buy shares, it is known as Initial Public Offering or IPO. More often IPOs are issued by small and new companies looking for capital to expand their businesses. However IPOs can also be issued by large privately-owned businesses looking to become publicly traded.
There are a number of reasons for listing shares on the public exchange by various companies. Since it is the first time the company is approaching the public for money it also sometimes known as “going public”.

Seeking capital is one of the primary reasons for listing shares by new and existing companies. Every company requires funds to develop and expand its infrastructure through purchase of new machinery, land or even repay its loans. This is achieved by listing shares in the Stock exchange for the public to buy. When a corporation lists its shares on a public exchange, it will always look to issue additional new shares so as to raise more capital simultaneously. The company gets the money paid by investors for the newly-issued shares. Purchasing shares from the primary market suggest that the buyer buys them directly from companies when they issue new shares or come out with IPOs.

Another reason for listing is that it allows a company to find a large group of stock market investors to provide IPOs with large volumes of capital for future expansion. The company that issues new shares or offer IPOs is not required to pay back the capital, and instead the new shareholders have a right to future profits distributed by the company. The current shareholders of a company will see their shareholdings diluted as a percentage of the shares of the company. However, the reason the shareholders invest is because they expect that the capital investment will make their shareholdings more valuable in absolute terms. In addition, the other listing reason is that the company will be able to issue more shares through a rights issue, thus attaining capital for expansion without incurring any debt.

The ability to increase huge capital from the general market is a rather good enough reason for listing. Instead of having to seek and negotiate with individual investors, listing company shares is a great way to help a company grow and expand without getting into any debts. Usually companies going through a transitory growth period offer IPOs in the stock exchange.

If you apply what you've just learned about IPO, you should have nothing to worry about.