What is IPO listing and What Happens once the IPO is listed in secondary market?

Introduction

IPOs, or Initial Public Offerings, are a process by which a private company becomes public by way of issuing its stock in the market to be traded. This is a great way for companies to raise capital. It is also a lucrative option for shareholders of such a company to get the bang for their buck.

To get started with the process of IPO listing, the company that wishes to go public must first undergo three major overhauls:

•    The decision-makers / founding members must come to terms with their company going public
•    The company must hire new muscle to look after policy/framework restructuring
•    Intensified marketing needs to be undertaken to give the first shares a good boost

Once all the internal processes are complete, the external activities begin. This includes gauging the eligibility based on IPO criteria published by the preferred exchange, learning about application processes and fee structure and getting abreast with SEBI guidelines, rules and regulations for going public. Issuing stock for the first time is a rigorous process, and it takes time for it to successfully conclude.

Let’s learn in detail about IPO listings and what happens when an IPO gets listed in the secondary market.

How Does IPO Affect a Company?

Going public has its benefits for a company, the biggest advantage being the fact that a significant amount of capital can be raised from the issued shares. Another great advantage constituted in going public is that the company gets exposure to a wider consumer base, owing to its intensified marketing efforts to make the IPO issuance successful. A boost in the market shares of a company is the direct result of IPO marketing.

With that said, there are a couple of downfalls as well of going public by IPO that can impact a company adversely. The following disadvantages associated with listing IPO are mentioned below:

•    The first disadvantage comes in the form of costs involved with compliance with the regulations. Especially in the case of companies of smaller scales, the fee structure, audits, investor relations and compliance overhauls may end up costing them dearly
•    The second disadvantage is the disclosure requirements mandated by regulatory authorities. Many companies may not want to make their investment information public; it may so happen that it reduces the trustworthiness of the brand

IPOs involve a long process to finally get a company listed on a stock exchange – it isn’t exactly a walk in the park. This is the primary reason why going public is a matter of great consideration.

IPO Listing

When a company decides to go public, there is a whole internal and external process involved before which IPO listing does not happen. While the internal processes are more about restructuring and marketing, the external processes involve assessing eligibilities, applying for IPOs and managing fees. Let’s discuss that in detail.

IPO Listing Eligibility as per SEBI

SEBI prescribes the eligibility criteria for companies wishing to go public. The following criteria must be met by a company going public for it to be eligible for IPOs.

Paid-Up Equity Capital

•    Should be greater than ₹10 crores
•    Capitalization of equity should be greater than ₹25 crores

Listing Conditions

The precedent conditions that the issuing company must adhere to before IPO listing are as mentioned in:
•    Securities Contracts (Regulations) Act of 1956
•    Companies Act 1956 / 2013
•    Securities and Exchange Board of India Act 1992
•    Any mandates issued by concerned authorities

Track Record

The issuing company must present a three-year track record of any one of the following:
•    The applicant who has applied for the IPO listing
•    The track record of the promoter or promoting company, whether incorporated in India or outside
•    Converted partnership firm. The subsequent company formed shall be governed by the regulations stipulated by SEB

Mechanisms

If a company desires to be listed, it must meet the following requirements:
•    Redressal mechanism that clarifies the details of pending investor grievances against the issuing company, subsidiaries and top 5 group companies that are listed by Market Cap
•    Mechanism designed for grievances redressal of investor complaints
•    The company must have paid off all its defaults before applying for IPO listing, as the listing will not conclude until all obligations are squared off

Post IPO Listings

When a company decides to issue IPO, several things happen.

•    The company gets restructured from a private to a public organization
•    The stock of that company gets issued for the first time in the primary market
•    The company may participate in early price discovery to put the right market value on its securities
•    When the company is listed and stock is made available in the secondary market, the shares are ready to be traded between stock exchanges and investors
•    In case the price discovery is very low, the stock may be traded in the OTC market

Conclusion

Deciding to go for IPO listing is a big decision for the founding members of a company. It is either a strategized move or a desperate action to raise funds by a company. Whatever the case, IPOs give the opportunity to a company to get down into the market and measure its own worth in terms of public opinion.

SEBI prescribes the eligibility criteria for a company to go public which it must fulfil. Additionally, there needs to be a regulatory compliance and grievance framework in place.