Initial Public Offering

Meaning
The first public offer of securities by a company after its inception is known as Initial
Public Offering. The IPO involves a private company offering its shares to the public for
purchase for the first time. It dilutes the ownership stake and diffuses corporate control as it
provides ownership to the investors in the form of equity shares. An IPO may be necessary
for a company to get the funding it needs to expand.

Reasons of going public

1. To raise funds for financing the capital expenditure needs like expansion, diversification, etc.
2. To finance increased working capital requirement.
3. As an exit route for existing investors.
4. For debt financing.

Advantages
1. The IPO provides avenues for funding future needs of the company.
2. It provides liquidity for existing shares.
3. The reputation and visibility of the company increases.
4. Additional incentives for the employees in the form of the companys stock if offered through
Employee Stock Option Plans (ESOP).this also helps to attract potential employees.
5. It commands better valuation for the company.

Disadvantages
1. The profit earned by the company should be shared with its investors in the form of
dividends.
2. An IPO is a costly affair. Around 15% to 20% of the funds realised is spent on raising the
same.
3. In an IPO, the company has to disclose result of operations and financial position to the
public and to the Securities and Exchange Board of India (SEBI).
4. The company has to invest substantial management time and effort.

Cost of Going Public

 Underwritten Fees
Company that seeks listing is obliged by the stock Exchange to have its issue to the
public underwritten. The fee is calculated as a percentage of the value of shares that will be
underwritten.
Selling Fees
Selling fees are payable to the various institutions that sell the companys shares. The
fee is calculated as a percentage of the value of shares that will be sold by the institution.
Management Fees
Management fees are payable to the managers of the issue and for the administration
of entire procedure. The fees are calculated as a percentage of the value of shares that will
be offered to the public.