Share Market

An initial public offering (IPO) is the first sale of stock by a formerly private company. It can be used by both small and large companies to raise expansion capital. All this to become publicly traded enterprises. These firms act in the capacity of an underwriter to help them correctly asses the value of their shares, that is, the share price.

An IPO, hence, allows a company to tap a wide pool of investors to provide it with summed up large capital for future growth. It also helps in repayment of debt or working capital. Interestingly, a company selling common shares is never required to repay the capital to investors.

There are many benefits in being a public company, like bolstering and diversifying equity base, exposure and public image, cheaper access to capital, having a better management, increased liquidity for equity holder and etc. There are some disadvantages too in IPO, like having good legal, accounting and marketing costs, attentive senior management which is not easy, risk funding, disclosing financial and business information etc.

The Initial Public Offering firms usually involve one or more investment banks known as the underwriters. The underwriter comes into play when a company offering its shares, called the issuer, enters a contract with him to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.

The sale, that is, the allocation and pricing of shares in an IPO may take several forms. Some common methods include the best efforts contract, Firm commitment contract, All-or-none contract, Bought deal and Dutch auction.

Lead by one or more major investment banks that is called the lead underwriter, a large IPO is usually underwritten by a syndicate of investment banks. Once the shares are sold, the underwriters keep a commission based on a percentage of the value of the shares sold. The value of such shares is called the Gross spread. Usually, the lead underwriters, i.e. the ones selling the largest proportions of the IPO, take the highest commissions up to 8% in sometimes.

There also are some Multinational IPOs that have many syndicates to deal with differing legal requirements in both the issuer’s domestic market and other regions. IPOs require a set of legal requirements and are quite expensive as it typically involves one or more law firms and they also must have some major practices in securities law.