Initial Public Offering

An initial public offering (IPO) is the first offer of a company's shares to the public. It enables an unlisted company to access public equity investors, but the company receives new capital only when the offer includes a fresh issue of shares, rather than merely a sale of existing shareholders' shares.

How fresh shares mobilise capital

A company divides its ownership into shares and offers newly issued shares to investors. Investors' subscriptions become equity capital, which the company can use for the purposes disclosed in its offer document.

• In a fresh issue, the company receives the subscription proceeds, net of issue expenses, and its outstanding share capital increases.
• In an offer for sale, existing shareholders sell their shares and receive the proceeds; this component does not bring fresh funds into the company.
• An IPO can combine both components, so its total offer size need not equal the capital raised by the company.
• For example, issuing 10 lakh new shares at ₹100 each raises gross proceeds of ₹10 crore before issue expenses.

How investors subscribe

The primary market connects the company seeking funds with investors subscribing to newly issued securities. The IPO process uses regulated intermediaries and disclosures to organise this mobilisation.

• The offer document explains the company's business, financial position, risks and proposed use of proceeds, enabling investors to assess the offer.
• The offer price may be predetermined through a fixed-price issue or determined through book building, in which investor bids help discover the price.
• After applications are processed, shares are allotted under the applicable rules and credited to investors' demat accounts.
• Subsequent trading on a stock exchange occurs in the secondary market; these trades ordinarily transfer money between investors, not to the company.

Why companies use equity financing

Unlike borrowing, equity financing does not require scheduled repayment of principal or contractual interest payments. However, raising equity involves sharing ownership and exposing investors to business risk.

• The company can use the funds for disclosed objectives such as expansion, capital expenditure or debt repayment.
• A fresh issue can cause ownership dilution, reducing existing shareholders' percentage holdings unless they acquire sufficient additional shares.
• Shareholders may benefit through dividends and capital appreciation, but neither is guaranteed.
• Listing provides a market for trading shares, while bringing disclosure requirements and public scrutiny.