What is IPO Listing? Primary vs Secondary

Initial Public Offering (IPO) is a popular choice for individuals seeking opportunities with companies poised for high growth. Many investors eagerly subscribe to IPOs, aiming to discover the next multi-bagger or capitalize on potential listing gains. IPO investments offer several advantages, but it’s crucial for investors to stay well-informed about the different aspects and benefits associated with participating in an IPO.

What is IPO listing?

An Initial Public Offering (IPO) is the process by which an unlisted company transitions to a publicly traded entity by offering its shares on the primary market. IPOs serve as a means for companies to achieve various objectives such as expanding existing operations, initiating new projects, or accomplishing any goals outlined in the company’s offer document.

What impact does an IPO have on a company?

let’s explore how a company can be impacted after launching an IPO:

1. Ability to Raise Funds: An IPO provides a company with a significant avenue to raise capital efficiently. When a company seeks to scale and expand, it often requires substantial funds that might not be easily attainable through traditional sources like banks or financial institutions. Furthermore, raising funds through debt capital comes with interest costs and specific conditions. In contrast, an IPO allows a company to raise equity capital without incurring interest expenses, which can be an attractive and cost-effective financing option.
2. Costs: While IPOs offer access to capital, they also entail various associated costs. During the IPO listing process, a company incurs administrative expenses, transaction costs, underwriter fees, and advertising expenditures to attract investors to subscribe to the offering. These costs should be carefully considered as part of the IPO decision-making process.
3. Equity Dilution: When a company chooses to go public through an IPO, it often results in the dilution of ownership for existing shareholders to some extent. IPO investors who purchase shares become shareholders in the company, which means they hold a portion of the company’s equity. This dilution is a trade-off for the capital infusion received through the IPO.
4. Better Public Image: Going public through an IPO can enhance a company’s public image and reputation, particularly in the eyes of investors. To list on stock exchanges, a company must adhere to transparency and accountability standards, meeting regulatory requirements. This commitment to transparency and meeting eligibility criteria can instill confidence in investors and the general public, contributing to a positive image for the company.

Overall, while IPOs offer substantial benefits such as access to capital and improved visibility, they also come with costs and changes in ownership structure that companies must carefully evaluate as part of their growth and financing strategies.

Eligibility Criteria for Equity IPO 

These are the key criteria and conditions for a company seeking to list its securities on an exchange, such as the National Stock Exchange (NSE), in India:

1. Paid-up Capital and Capitalization:

• The applicant’s paid-up equity capital must be at least 10 crores.
• The capitalization of the applicant’s equity must not be less than 25 crores.
• Capitalization is calculated as the product of the issue price and the post-issue number of equity shares.
• If the market capitalization requirement is not met, the securities will not be listed on the exchange.

2. Conditions Precedent to Listing:

• The issuer must comply with conditions preceding listing as specified in relevant laws and regulations, including the Securities Contracts (Regulations) Act 1956, Companies Act 1956/2013, and the Securities and Exchange Board of India Act 1992.
• Adherence to circulars, guidelines, and clarifications issued by relevant authorities is also required.

3. Three Years Track Record:

• The applicant seeking listing or its promoters/promoting company must have a track record of at least three years.
• For this purpose, annual reports of the three preceding financial years must be submitted.
• The company should not have been referred to the Board of Industrial & Financial Reconstruction (BIFR), and no proceedings should have been admitted under the Insolvency and Bankruptcy Code.
• The company should not have received any winding-up petition admitted by the National Company Law Tribunal (NCLT).
• The net worth of the company should be positive, with exceptions for companies with proposed issue sizes exceeding Rs. 500 crores.

4. Redressal Mechanism of Investor Grievance:

• The company should have mechanisms in place for addressing investor grievances.
• Details of pending investor grievances against the issuer, listed subsidiaries, and top 5 listed group companies by Market Cap should be provided.
• Arrangements for redressing investor grievances, including through the SEBI Complaints Redress System, must be explained.

5. Defaults in Payment:

• Any defaults in payment of interest and/or principal to debenture/bond/fixed deposit holders by the applicant, promoters/promoting company(ies), group companies, and subsidiary companies are considered.
• The securities of the applicant company may not be listed until all pending obligations relating to the payment of interest and/or principal are cleared.

6. Rejection Cooling Off Period:

• The applicant’s application for listing should not have been rejected by the exchange in the last 6 complete months.
• Special considerations apply if a company seeks listing within six months of an IPO.

Please note that meeting these criteria and conditions is essential for a company to be eligible for listing on the exchange, and compliance with regulatory and legal requirements is crucial throughout the listing process.

Primary vs. Secondary:

Primary and secondary markets are two fundamental components of the financial market that serve different purposes and involve different types of transactions:

Primary Market:

1. Definition: The primary market, also known as the new issue market, is where companies issue new securities, such as stocks, bonds, or other financial instruments, to raise capital for various purposes, including expansion, debt repayment, or business operations.
2. Participants: Participants in the primary market include the issuing company, investment banks (underwriters), and individual or institutional investors.
3. Transactions: In the primary market, securities are sold by the issuing company directly to investors through methods like Initial Public Offerings (IPOs) or Private Placements.
4. Purpose: The primary market is primarily used for capital formation, allowing companies to access funds from the public or private investors by selling newly issued securities.

Secondary Market:

1. Definition: The secondary market, also known as the stock market or securities exchange, is where previously issued securities are bought and sold among investors without the involvement of the issuing company.
2. Participants: Participants in the secondary market include individual investors, institutional investors, traders, and market intermediaries like stockbrokers and stock exchanges.
3. Transactions: In the secondary market, investors trade existing securities (stocks, bonds, etc.) among themselves, seeking to buy or sell based on their investment goals and market conditions.
4. Purpose: The secondary market provides liquidity to investors by allowing them to buy or sell securities after the initial issuance. It doesn’t directly raise capital for the issuing company, as the proceeds from secondary market transactions go to other investors, not the company.

In summary, the primary market is where securities are initially issued, and funds are raised for the issuing company. The secondary market is where previously issued securities are traded among investors, providing liquidity and a platform for buying and selling existing securities. Both markets are essential components of the broader financial market ecosystem.

An Initial Public Offering (IPO) offers several benefits to both companies going public and investors:

Benefits for Companies:

1. Access to Capital: IPOs provide companies with an opportunity to raise capital by selling shares to the public. This influx of funds can be used for various purposes, including expansion, debt reduction, research and development, and working capital.
2. Enhanced Visibility and Credibility: Going public often results in increased visibility and credibility for a company. Being listed on a stock exchange can attract attention from institutional investors, analysts, and the media, which can enhance a company’s reputation.
3. Liquidity for Existing Shareholders: Existing shareholders, such as founders, early investors, and employees, can benefit from an IPO by selling their shares in the open market, realizing the value of their investments.
4. Currency for Acquisitions: Publicly traded stock can be used as a form of currency for potential acquisitions, making it easier to negotiate and execute mergers and acquisitions.
5. Employee Incentives: IPOs can be used to incentivize employees through stock-based compensation plans, as employees can receive stock options or grants that have the potential to appreciate in value.

Benefits for Investors:

1. Investment Opportunities: IPOs offer investors the chance to invest in companies at an early stage of their growth, potentially reaping substantial returns if the company performs well post-listing.
2. Liquidity: Once a company goes public, its shares are typically traded on stock exchanges, providing investors with liquidity. They can easily buy and sell shares in the secondary market.
3. Portfolio Diversification: Investing in IPOs can be a way for investors to diversify their portfolios and gain exposure to different sectors and industries.
4. Market Information: The IPO process requires extensive disclosure and regulatory scrutiny, providing investors with detailed information about the company’s financial health, operations, and management. This transparency can aid in informed investment decisions.
5. Price Discovery: The stock price of a newly listed company is determined through market demand and supply dynamics, which helps establish a fair market value for the shares.

It’s important to note that while IPOs offer significant benefits, they also come with risks. Investors should conduct thorough due diligence and consider their risk tolerance and investment objectives before participating in IPOs. Additionally, companies must carefully evaluate the decision to go public, as it involves compliance with regulatory requirements and ongoing reporting and governance obligations.