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How do companies raise funds?

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Initial Public Offering (IPO) is a popular way for companies to raise capital and expand their operations. 2023, saw a surge in IPOs. These were not just about raising funds but also offering investors a chance to make money quickly. While many investors dream of IPO riches, success isn't guaranteed for every company that goes public.

Understanding IPOs

Initial Public Offering (IPO) is a process by which a privately held company offers its shares to the public for the first time on a stock exchange. This allows the company to raise capital from a large pool of investors, which can be used for various purposes. It is an opportunity for a company to expand its operations by issuing shares to the public.

An IPO is a significant event in a company's journey towards growth and expansion. The process of IPOs in India is governed by the Securities and Exchange Board of India (SEBI), who makes rules and regulations that companies must comply with.

An IPO is like the end of one stage in a company’s life-cycle and the beginning of another, raising funds through selling shares to the public.

The Largest IPO in history

The world's largest IPO in history was done by Saudi Aramco. The company went public on the Tadawul (the Saudi Stock Exchange) on December 11, 2019. It raised $25.6 billion by selling three billion shares. That initial figure increased to $29.4 billion after Aramco sold an additional 450 million shares.

IPOs on the other side

Despite the success stories, not all IPOs end well. Back in history, over 60% of IPOs between 1975 and 2011 saw negative returns after five years.

Some companies go public just to give existing investors an exit, with no real plans for future growth. This can leave new investors clueless.

One such case happened during Reliance Power's IPO in 2008, which was hyped by brand name. But the market crash soon wiped out 70% of its value, exposing its vulnerability. The company’s share price was -95.6 percent since listing. It is still referred to as one of the worst IPOs in India.

The Roadshow

Before an IPO, companies and their underwriters go on a roadshow, meeting with potential investors and analysts to pitch their story and build excitement. A successful roadshow is crucial for a good IPO.

LIC, India's largest IPO giant, in mid-2022 hit the road pre-launch, attracting global investors. Roadshows aimed to win trust by unveiling LIC's story, boosting confidence, and expanding global outreach. Although the end result did not turn well, the hype was worth observing.

The trend of IPOs

Investors are drawn to IPOs for the potential for quick and high returns. Companies that go public are typically growing fast and have the potential to become big players in their industry. If they succeed, early investors can give the rewards. However, there are also the risk of the companies failing to live up to expectations, leading to losses for investors.

Why do companies need money?

Raising Capital

One of the primary reasons companies go public is to raise capital. They can use the funds raised through an IPO to expand their operations, invest in research and development, pay off debts, and improve their financial position.

Liquidity for Private Equity Investors

Private equity investors can sell their shares to the public through an Offer for Sale (OFS) when a company goes public. This provides them with an opportunity to liquidate their holdings and earn a return on their investment.

Company Growth

Companies often hold IPOs to fund their growth plans, such as expanding into new markets, increasing production, and improving their infrastructure.

Mergers and Acquisitions

A successful IPO can provide a company with the funds needed for mergers and acquisitions.

Improved Financial Position

The sale of a company's shares to the public can produce significant liquidity and capital, which can be used to improve the company's financial position and negotiate better loan terms.

Liquidity and Marketability

When a company's shares are listed on a stock exchange, they become easily tradable and marketable, encouraging investors to acquire a stake in the company.

Price Transparency: The listing of the stocks can result in increased price transparency, which can benefit the company and its investors.

Should you invest in IPOs?

Do it carefully. While the potential rewards are high, so are the risks. Do your research, focus on the company's long-term vision, and diversify your portfolio. Remember, IPOs are just one piece of an investment medium.

‘If you plan to invest in an IPO, be ready to play the market’s wild card’.

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