Initial Public Offering:
The first public offer of securities by a company after its inception of known as Initial Public Offering (IPO). IPO dilutes the ownership stake and diffuses corporate control as it provides ownership to investors in the form of equity shares. It can be used both as an exit strategy and a financing strategy. As a financing strategy, its main purpose is to raise funds for the company. When used as an exit strategy, existing investors can offload their equity holdings to the public.
Reasons for going public:
1. To raise funds for financing 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.
1. The IPO provides avenues for funding future needs of the company.
2. It provides liquidity for the existing shares.
3. The reputation and visibility of the company increases.
4. Additional incentive for employees in the form of the company’s stocks if offered through Employee Stock Option Plans (ESOP). This also helps to attract potential employees.
5. It commands better valuation for the company.
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%-20% of the funds realized is spent on raising the same.
3. In an IPO, the company has to disclose results of operations and financial position to the public and the Securities and Exchange Board of India (SEBI).
4. The company has to invest substantial management time and effort.
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