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What is an Initial Public Offering (IPO)?

Initial Public Offering (IPO):

 

An IPO or initial public offering is the process by which a privately held company, or a company owned by the government such as LIC, raises funds by offering shares to the public or to new investors. Following the IPO, the company is listed on the stock exchange.

  • While coming with an IPO, the company has to file its offer document with the market regulator Securities and Exchange Board of India (Sebi).
  • The offer document contains all relevant information about the company, its promoters, its projects, financial details, the object of raising the money, terms of the issue, etc.
  • In order to protect investors, Sebi has laid down rules that require companies to meet certain criteria before they can go to the public to raise funds.
  • Among other conditions, the company must have net tangible assets of at least Rs 3 crore, and net worth of Rs 1 crore in each of the preceding three full years, and it must have a minimum average pre-tax profit of Rs 15 crore in at least three of the immediately preceding five years.
  • While listing on the stock exchange calls for additional disclosures by companies on a regular basis, leading thereby to more stringent compliance requirements, it may help a company raise capital, and diversify and broaden its shareholder base.
  • Listing provides an exit to existing investors of the company.
  • A listed company can raise share capital for growth and expansion in the future through a follow-on public offering or FPO.

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