What is the full form of IPO?

You might have heard about IPOs, especially if you follow the stock market or are interested in investing. An Initial Public Offering, the full form of IPO, marks a pivotal moment in a private company's trajectory as it ventures into the realm of the general public by offering its shares. This transformative event enables the company to transition from privately held to publicly traded. Once a company goes public through an IPO, it can experience a significant surge in visibility, financial strength, and market presence.

Key Highlights

• IPO full form is an Initial Public Offering.

• An initial public offering is a process of making new shares available to the corporate world.

• This will permit the company to generate revenues from public investors.

IPO Full Form

As mentioned above, IPO full form in banking and stock market refers to an Initial Public Offering. Launching an IPO is a significant milestone for any company as it provides an opportunity to raise substantial capital. This infusion of funds empowers the company to pursue ambitious business goals that might have otherwise been challenging to achieve in the near term, such as rapid expansion.

Additionally, going public increases transparency and credibility through share listing, which can positively impact the company's ability to secure favourable terms when seeking borrowed funds.

When considering whether to go public, a company must not solely focus on its financing needs. Instead, it should assess various factors, including its stage of development and readiness to meet the regulatory requirements set forth by governing bodies like SEBI.

Furthermore, the company should feel confident in its ability to fulfil its responsibilities to public shareholders as it transitions from a private entity to a publicly traded one. This involves maintaining financial transparency, adhering to reporting obligations, and effectively managing shareholder interests.

Why Do Companies Launch IPOs?

As you now know, the long form of IPO is Initial Public Offering, and you may be wondering why companies choose to go public by launching an IPO. The primary reason for this move is to raise capital.

By offering shares to the public for the first time, companies can gather significant funds, which they may use for expansion, debt repayment, or to invest in new projects. Going public not only helps a company raise money but also boosts its visibility and credibility in the market, attracting more customers and business opportunities.

Additionally, IPOs offer a way for early investors and company insiders to cash out and realise the value of their investments. This provides liquidity, making it easier for shareholders to buy and sell shares in the open market.

For the company itself, an IPO can lead to a higher valuation, helping it access future capital more easily and improving its market presence. This can be an important step in a company’s growth and long-term strategy.

In essence, the decision to launch an IPO is a strategic one that goes beyond the immediate financial needs of the company. It represents a commitment to growth and accountability as the company enters the public market and embarks on a new chapter in its corporate journey.

Examples of IPO

The examples of an IPO are as follows.

1. Reliance Power IPO: Reliance ADA group is India's biggest commercial conglomerate, with operations in telecommunications, finance, entertainment and media, infrastructure facilities, power plants and other sectors. The Initial Public Offering, which has a value of INR 11,700 crores, was immensely successful between 15-18 January 2008.

2. GIC IPO: GIC offers property, power, marine, engineering, miscellaneous, aviation, liabilities, aircraft, hull, spare parts, etc. The IPO was issued between 11-13 October 2017 with an IPO value of INR 11,256. 83 Cr.

3. ONGC IPO: Oil and Natural Gas Corporation (ONGC) is the government's main agency for exploring and exploiting India's petroleum resources. The overall value of the IPO was INR 10,534 Cr issued from 5 to 13 March 2004.

4. Paytm IPO: Paytm, one of India's largest digital payment companies, launched its IPO in November 2021, raising INR 18,300 crores. This IPO was one of the biggest in India’s history and was closely watched due to the company’s prominence in the fintech sector. Despite some initial challenges, Paytm's IPO highlighted the growing interest in digital payment and technology-driven companies in India.

5. Nykaa IPO: Nykaa, an Indian e-commerce platform specialising in beauty, wellness, and fashion products, went public in November 2021, raising INR 5,352 crores. Nykaa's IPO attracted significant investor attention due to its leadership in the beauty and wellness market, especially in a growing online retail sector. It was one of the most successful IPOs of the year, reflecting the shift towards online shopping and e-commerce growth.

6. LIC IPO: The Life Insurance Corporation of India (LIC), the country’s largest insurer, launched its IPO in May 2022, raising INR 21,000 crores. The IPO was a landmark event as it was the largest-ever IPO in Indian history at the time. The move was part of the government’s push to privatise state-owned enterprises, and LIC’s IPO received a great deal of public and investor attention, reflecting the significance of the corporation in the Indian economy.

IPO Working Mechanism

After making the critical decision to go public, a company embarks on a series of crucial steps to ensure a successful IPO. The foremost and pivotal step involves appointing a merchant banker, also known as Book Running Lead Managers (BRLM) or Lead Managers (LM).

The merchant banker is vital in guiding the company through various aspects of the IPO process, ensuring a seamless transition into the public domain. The responsibilities of the merchant banker encompass the following:

• Conducting Due Diligence: Thorough due diligence is performed on the company seeking to go public. This ensures compliance with legal regulations and results in issuing a due diligence certificate, validating the company's readiness for the IPO.

• Preparing Listing Documents: Working closely with the company, the merchant banker assists in preparing essential listing documents, with the most prominent being the Draft Red Herring Prospectus (DRHP). These documents provide critical information to potential investors.

• Underwriting Shares: The merchant banker takes on the role of underwriting the IPO shares. Essentially, they commit to purchasing all or a portion of the shares being offered and resell them to the public.

• Determining the Price Band: Collaborating with the company, the merchant banker helps arrive at the price band for the IPO. This price band sets the lower and upper limits within which the company's shares will be offered to the public.

• Assisting with Roadshows: The merchant banker plays a vital role in organizing and conducting roadshows. These events serve as promotional and marketing activities for the company's IPO, generating interest among potential investors.

Apart from appointing the merchant banker, the company also engages other intermediaries, including registrars, bankers, and advertising agencies. These entities collaborate with the lead managers to develop effective marketing strategies for the IPO.

Once the company forms a partnership with the merchant banker, the concerted efforts of both parties are focused on taking the company public. The IPO journey is marked by careful planning, meticulous execution, and effective communication to ensure the offering garners investor confidence. It sets the stage for the company's growth and success in the public market.

IPO Advantages

1. Access to Capital: IPOs offer companies a chance to raise substantial funds to fuel their growth and strategic initiatives, which might have been limited in the private domain.

2. Enhanced Visibility: Going public brings heightened visibility and brand recognition, potentially attracting more customers and business partners.

3. Currency for Acquisitions: Publicly traded shares can be used as currency for acquisitions, facilitating growth through mergers and acquisitions.

4. Liquidity for Founders and Early Investors: IPOs provide an exit strategy for early investors and founders, allowing them to liquidate their stakes partially or entirely.

5. Growth Potential: IPOs present investors with an opportunity to invest in promising companies early, with the potential for substantial capital appreciation as the company grows.

6. Diversification: Investing in IPOs can benefit an investor's portfolio by adding exposure to new industries or sectors.

7. Liquidity: Being listed on a stock exchange, IPO shares provide liquidity, allowing investors to buy and sell shares easily.

IPO Disadvantages

1. Cost and Complexity: The process of going public is expensive and time-consuming. Companies have to bear significant costs related to legal, accounting, underwriting, and marketing fees. Additionally, the IPO process involves extensive regulatory compliance and reporting requirements, which can be complex and demanding for the company's management team.

2. Loss of Control: A company's ownership is dispersed among many shareholders by going public. This could result in losing majority control by the founding team or existing shareholders, leading to potential conflicts of interest or a diluted decision-making process.

3. Increased Scrutiny: Public companies face greater scrutiny from shareholders, analysts, and the media. They must meet quarterly reporting obligations and provide more transparency about their financial performance, business operations, and future plans. This level of scrutiny can put additional pressure on management.

4. Lack of Historical Data: IPOs often involve relatively new companies with limited historical financial data. This makes it challenging for investors to accurately assess the company's performance and potential, increasing investment risks.

5. Limited Information: Before an IPO, companies provide a prospectus that contains relevant information for potential investors. However, this document may only disclose some relevant details about the company, and investors may have limited insights into the company's future prospects and risks.

6. Lock-Up Periods: Key insiders and early investors are usually subject to lock-up agreements that prevent them from selling their shares for a specified period after the IPO. This can create supply-demand imbalances, affecting the stock price.

How to Participate in IPOs?

You can participate in IPOs using two main methods: through a trading account or a bank account. Here is how you can apply for an IPO using both:

1. Trading account

• Open a trading account with a registered stockbroker like Kotak Securities.
• Log in to your account on the trading platform or app.
• Look for the IPO section and select the IPO you want to invest in.
• Fill out the application form with necessary details such as the number of shares you want to apply for.
• Choose the payment method through UPI ID or Application Supported by Blocked Amount (ASBA).
• Submit the application and wait for the IPO allotment process.
• Once the allotment is completed, shares are credited to your Demat account, and the payment is processed.

You can track your IPO status and updates directly through the platform.

2. Bank account

• Apply via your bank’s net banking service, provided they support IPO applications.
• Select the IPO from the list available in the “IPO section”.
• Enter your UPI ID or use the ASBA method.
• Confirm the amount and submit your application.
• Your application will be processed, and funds will be blocked until the allotment is done.
• Once allotted, the shares are credited to your Demat account, and the payment is settled.
• You will receive updates and confirmation through your bank or trading platform.

Here’s the entire process on how to apply for IPOs through both these methods. Kotak Securities makes it easy to apply for IPOs on its trading app. To learn how to apply for an IPO using UPI ID on the Kotak Securities trading app, click here.

Read More: How to Apply for IPO?

Tips for Investing in IPOs

When investing in IPOs, it is essential to do thorough research. Look at the company's financial health, growth potential, and the sector it operates in. Avoid rushing into investments based solely on hype. It is also wise to apply for IPOs through reliable and user-friendly platforms.

Do not invest more than you can afford to lose. Diversify your investments to reduce risk. Always check the IPO's pricing and be cautious about investing in overvalued stocks. Monitor market trends and stay updated on the IPO's performance after its listing. Keep a long-term perspective for better returns and review the company’s future growth strategy carefully.

In Conclusion

IPOs play a crucial role in the financial ecosystem by connecting companies seeking capital with investors seeking growth opportunities.

They represent an exciting milestone for companies, transforming them into publicly traded entities, while providing investors with an opportunity to participate in their growth story.

However, investing in IPOs also carries risks, as newly listed companies may face volatility and uncertainty in their early days as publicly traded entities. As with any investment decision, conducting thorough research and seeking professional advice is essential to make informed choices in the dynamic world of IPOs and the share market.