Initial public offering, famously known as IPO, is the first step for making a company goes public and giving the ownership of the firm to general public and investors through free float. Many new traders might arrive at a question that where does all this money go after subscribing to it?
Simple answer is company. But, it is much deeper than it seems.
The process of IPO is very tedious and time taking, it takes around a year or even more for all parties to come to a same page and go public. It involves clearances from regulating authorities, investment banks supervision, a law firm for legal assistance and many more.
All the trading that occurs on the stock market after the IPO is between investors; the company gets none of that money directly. The day of the IPO, when the money from big investors hits the corporate bank account, is the only cash the company gets from the IPO.
When the money hits the bank account, it is a little less than the total raised in the IPO. For example, the company might get 92 percent of the money. The other 8 percent goes to pay the people who helped usher the IPO through the process: law firms, accountants and the primary investment bank that handled the IPO. Still, the company receives a huge amount of cash — cash it can now use to grow the business.
The remaining 92% of the money is used by the company accordingly, as there is, in most cases, an agenda behind an IPO whether it is an expansion, new business model or anything.
A latest example can be Nykaa, Zomato and Policy bazaar.
The initial public offering (IPO) of FSN E-Commerce Ventures Ltd, popularly known as “Nykaa” which runs an online marketplace for beauty and wellness products open with a big number mainly because of financially strong institutional investors.
Nykaa plans to use the proceeds from the IPO for expansion, by setting up new retail stores and establishing new warehouses. It also plans to retire some of its debt, which should bring down interest costs and further shore up its profitability.
The much-anticipated domestic public offer of food tech major, “Zomato”, is here, with a blast as the IPO was oversubscribed and the allotment took more time than anticipated.
Earlier, Akshant Goyal, chief financial officer, Zomato Ltd, had said during a press conference that the proceeds from the IPO will be used for organic and inorganic growth, with 25% earmarked for general corporate purposes.
Post IPO, Zomato will have close to ₹15000 crore (roughly $2 billion) in the bank to grow its business.
The above IPO’s are just an example to show how the IPO market work and these performances are with accordance to the Indian market.