Disadvantages of IPO is another side of the coin where we discussed the advantages of IPO. Yes, there are concerns about investing in IPOs as well, that you most certainly be aware of. In this detailed review, we will do exactly that and make sure you know the con side of IPOs.
Every coin has two sides. This age-old saying applies to Initial Public Offering (IPO) as well. Although an IPO provides huge funds required to expand a business, it often comes with some costs involved in the process.
Disadvantages of IPO – Details
There are some disadvantages of IPO, which are going to be discussed below:
Expenses of Filing an IPO:
Filing of an IPO is a costly affair and includes many costs like legal fees, printing costs and accounting fees, involved in the filing of the offering. Also, an underwriter is always hired for the process of filing of the IPO. Some companies even hire public relations firms in order to handle media.
This is one of the biggest economic disadvantages of IPO for companies.
Complexities in and After the Process:
In order to comply with the rules and regulations laid down by the Securities and Exchange Board of India (SEBI), a number of advisors need to be hired for the process of filing an IPO. For example, financial and legal advisors, auditors, accountants, etc. In absence of services of experts in relevant fields, it is very difficult to manage the whole process in an efficient manner.
Also, the fees related to hiring these experts are an additional cost for the company.
After the company has gone public, it comes under the strict supervision of SEBI and the stock exchange. The increase in regulatory oversight puts pressure on the promoters and may result in the ways it was being managed before going public.
Also, mandatory filings need to be filed with SEBI at regular intervals for different purposes. Sometimes, due to the regulatory requirements, sensitive information about the business is also made available to competitors, employees and customers.
This is certainly one of the painful disadvantages of IPO can prove to be expensive for companies going public.
Wastage of Time:
A lot of time is wasted in the whole process of going public. Commonly, it takes six to nine months or even longer to launch an IPO. And as we all know, time is money. If that time had been utilised in a better way, the business would have been made more successful.
Thus, the overall IPO process must be relatively simpler in implementation and less of a hassle for the business going for it.
Since an IPO brings a large number of shareholders with it, the ownership of the company is now distributed among a large number of stakeholders. The promoter and original investors are not in a position to take all the decisions regarding the business of the company by themselves.
They need to not only inform all the shareholders but also seek their approval in every major decision. This applies even when the other shareholders do not hold the majority stake in the company. Special shareholder meetings are held for discussions regarding different decisions.
They have the power to override management’s decisions and even change the members of the Board of Directors. This is one of those disadvantages of IPO that result in the dilution of power and may result in the downfall or deceleration in the growth of a business.
Also, due to dilution of power, the business becomes a little vulnerable and faces a major risk of unsolicited/hostile takeovers.
One major reason why a company goes public is to provide liquidity to a promoter and original shareholders. Suppose a promoter sells a part of his holding to ease his financial burden, it can be seen in a different light by shareholders. they might think that the promoter is not confident enough about his own business.
Now, shareholders are at liberty of selling their stakes anytime they want. If many shareholders sell their large amounts of stakes at the same time, the prices of the shares would drop, thus decreasing the overall value of the company.
With this, we wrap up this share market education content piece on disadvantages of IPO.
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