IPO (Initial Price Offering):
In general, when a company does not have a public listing and has a limited number of shareholders, the company is regarded as a private company. But in certain cases when the company needs more funds (due to lack of possessions) to operate its businesses, the company might go public by means of IPO (Initial Price Offering). Thus, by means of IPO, a company offers shareholdings or ownership rights to individual investors, mutual funds, institutional investors, etc.
Steps of IPO (How a company gets itself registered from a private company to a publicly listed company?):
A company when desires to go public by means of IPO, the company initially needs to employ investment banks (i.e., Axis bank, SBI, IIFL, etc) and by that means the hired banks which are set by certain rules, go through the company’s profile, past performance, history, statistics, etc and afterwards sets the IPOs asking price, evaluates certain other costs and values, which are necessary to valuate the stock for its initial sale and distribution.
Risks associated with IPOs:
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There might be various growth prospects in an IPO but there are several risk factors that are associated with an IPO. Those are:
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Lack of further growth potential: Large companies that opt for IPOs might have fulfilled their personal interests, there could be lack of further growth potentials for the company. Several stocks can be observed in the recent past which have shown significant degrowth on its initial listed value and slided as much as 80%.
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Over valuation: Few of the private companies, while getting itself listed as an IPO and trading as a public company, expects major capital inflows which could be of service to its enormous debts and liabilities. A company’s true market value could take a lot of time to get surfaced after its initial enlistment.
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IPO, a last resort to rescue a company: In many scenarios IPOs are taken as a last resort to rescue a company from its gigantic liabilities. Thus, in a good number of cases the IPOs are offered for the well being and in the interest of the offeror (company) rather than the public.
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Over priced: The IPOs could be overpriced by a lot. The asking price or bundle price for an IPO are determined by the company and its investment bank, which rarely projects the accurate value of its true worthiness. Capital raised by means of IPOs could be more beneficial for the company’s promoters and associates rather than the retail investors.
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Failed IPOs of the recent past:
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One 97 Communications Limited.
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General Insurance Corporation of India Limited.
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New India Assurance Company Limited.
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Reliance Power Limited.
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Cairn India Limited.
It has already been demonstrated previously in numerous reports that for the last few years the profitability rate for an IPO had been a mere 20% or even lower.