Initial Public Offering (IPO): What It Is and How It Works

  1. Stock Markets Basic
    1. Invest:3 benefits of investing for your future
    2. Types of Investment Diversification asset classes
    3. What is the share market? What Does It Do and How Does It Work with examples
    4. SEBI What is Securities and Exchange Board of India
    5. Stock Broker Financial Intermediaries or Market Intermediaries role in share market
    6. Depository and types of Depository Participants in India
    7. ICCL, NSE Clearing Limited and Bank’s role as Financial intermediary
    8. Angel Investors What are their roles with examples
    9. Venture Capitalist Who Are They and What Do They Do
    10. CAPEX Understanding Capital Expenditure with examples
    11. Private Equity Explained Understanding PE With Examples
    12. Initial Public Offering (IPO): What It Is and How It Works
    13. Launch IPO Why Do Companies Go Public
    14. IPO process how Initial Public Offering works in India
    15. What is IPO Key Terms Related to Initial Public Offering
    16. What is the share market?
    17. Share price understanding how does prices increase or decrease with examples
    18. Share trading: How Does It Work? with examples
    19. Types of traders in share market
    20. Market Index How Indexing Works, Types, and Examples in share market
    21. Share market indices importance and key terms
    22. Index construction methodology
    23. Share market terminology
    24. Share market terminology for beginners
    25. How to Trade Shares for Beginners
    26. Clearing and settlement process in the Indian Share market
    27. Stock selling learn What happens when you sell a stock
    28. Corporate actions in share market and impact on prices
    29. Bonus Issue of Shares Explained and How They Work
    30. Stock Split and Buyback of Shares What you need to know
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    33. Purchasing Managers Index, Budget, Corporate Earnings Announcement and Non-Financial events
    34. Stock market basics for beginners
    35. Offer for Sale and Follow-on Public Offer explained with examples
    36. Rights Issue and its relevance to shareholders explained with examples
Marketopedia / Stock Markets Basic / Initial Public Offering (IPO): What It Is and How It Works

Part 5- The IPO 

The Initial Public Offering (IPO) is an event that signals the official introduction of a venture onto the share market. When a business – or other entity – decides to “go public” by listing their organization on a recognized exchange, an IPO is required. This process involves the offering of shares to investors, allowing these backers to become partial owners in the company.

Let’s come back to our example: 

Five years after the initial PE investment, the company has achieved great success. They have expanded their product range and are now present in major cities all over the country. Revenues and profits remain solid, and the investors are happy. The promoter, nevertheless, has no intention of stopping here and is determined to move forward with their plans.

The promoter has set their goals on global expansion! They want the brand to be accessible in all major international cities, establishing a minimum of two outlets in major cities across the globe. 

The company requires an estimated CAPEX of 3500 Crs in order to conduct market research, hire personnel, and expand manufacturing capabilities. Additionally, they need to acquire real estate internationally. To finance these expenses, the management has multiple options available.

Relying on internal accruals to finance capital expenditures is an effective option. This way, fundraising can be avoided, and money available within the organization can be utilized.

  1. Obtain additional funding from a private equity fund in series D.
  2. Obtain funds from banks to meet our financial needs.
  3. Float a bond, another way of obtaining debt.
  4. Submit an application for an Initial Public Offering (IPO).

Taking into account all of the above, it makes sense to pursue a combination of these elements.

Assuming the company decides to finance part of its CAPEX through internal accruals and the other portion via an IPO, it would have to offer its shares to the public. Investors, i.e. the general public now can then choose whether or not they want to invest, by paying a particular price. This type of offer is known as an ‘Initial Public Offer’.

We find ourselves at a critical point where several questions must be addressed.

  1. What prompted the company to pursue an IPO? What is the general motivating factor behind companies becoming publicly traded?
  2. What prevented them from filing for an IPO during their Series A, B, and C funding rounds?
  3. What will be the outcome for existing shareholders after the IPO?
  4. What does the public take into account prior to subscribing to an IPO?
  5. What are the steps toward an IPO?
  6. Which financial intermediaries participate in the IPO markets?
  7. Once the organization has gone public, what are the next steps?

In the next chapter, we will answer the above questions and provide more insights into the IPO Market. Through this chapter, we hope you have gained an understanding of the steps typically taken in order to pursue a public offering.