Initial Public Offering (IPO) is when a company is offering its shares to the public for the very first time. Before the IPO, the company’s shares are not listed on a stock exchange and the number of shareholders are relatively very less, usually comprising the founders, their families and friends, private equity investors like venture capitalists or angel investors, senior management (through ESOPs).
IPO can be a primary offering - fresh issue of shares by company or a secondary offering (offer for sale) wherein the existing investors sell their shares and no money flows into the company or both primary and secondary offering. In case of fresh issue, share capital rises / expands.
Pursuant to an IPO, shares are issued to both individual and institutional investors, who till now had no stake in the company. Post the IPO, shares get listed and are traded on the stock exchange. The IPOs are governed by the SEBI regulations and companies bringing out an IPO have to follow certain set of rules and regulations for listing, allotment to investors, timelines, disclosures, lock-in of shares etc.
IPO helps the private companies raise money to grow and expand directly from the interested investors throughout the stock market instead of approaching additional PE investors or borrowing from banks/ financial institutions. It also helps the company to build a brand reputation for itself which may improve credit ratings, lower interest rates, improve sales and profits. Lastly, IPOs help ascertain value of the company and networth of its promoters and investors, facilitating mergers and acquisitions and strategic opportunities.