Question

Compose a paper WITH YOUR OWN WORDS (Paraphrase from several sources, and avoid plagiarism) that consist of 3500 words, about why real estate developers decided to Go public, the paper consist of:
-Introduction
-Discussion
-Conclusion and suggestion

Answer 1

• Introduction:

  Real estate development, or property development, is a business process, encompassing activities that range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of developed land or parcels to others. Real estate developers are the people and companies who coordinate all of these activities, converting ideas from paper to real property. Real estate development is different from construction, although many developers also manage the construction process.

• Developers buy land, finance real estate deals, build or have builders build projects, create, imagine, control, and orchestrate the process of development from the beginning to end. Developers usually take the greatest risk in the creation or renovation of real estate and receive the greatest rewards. Typically, developers purchase a tract of land, determine the marketing of the property, develop the building program and design, obtain the necessary public approval and financing, build the structures, and rent out, manage, and ultimately sell it.

  Sometimes property developers will only undertake part of the process. For example, some developers source a property and get the plans and permits approved before selling the property with the plans and permits to a builder at a premium price. Alternatively, a developer that is also a builder may purchase a property with the plans and permits in place so that they do not have the risk of failing to obtain planning approval and can start construction on the development immediately.

  Developers work with many different counterparts along each step of this process, including architects, city planners, engineers, surveyors, inspectors, contractors, lawyers, leasing agents, etc. In the Town and Country Planning context in the United Kingdom, 'development' is defined in the Town and Country Planning Act 1990 s55.

• Discussion:

  Say you are an entrepreneur, who started a corporation, with a few closely known members as the shareholders. The profit or loss of the Company is borne by these people. As the company continues to mature, and is seen to have growth potential, any Company head would think of making their business even bigger. To make it even bigger, to achieve greater heights, you will need a huge capital investment. And you cannot rely on the banks every time.

  This is when you should start contemplating on the pros and cons of making an Initial Public Offer.

  What are the advantages of going public?

  1. Raises a lot of money

  This is the chief reason d’être for a company going public. The company may need money to clear off debts, to invest in research and development, to expand the existing unit, to improve infrastructure and many such reasons which help in their future development.

• 1. Increases liquidity

  The employees, the stakeholders and the venture capitalists would have put their sweat and blood for the company to achieve considerable success. The company would have paid them in the form of equities. When the company goes public, it is the time when they start reaping benefits in the form of cash.

  1. Helps in mergers and acquisitions

  When a public company enters into a deal for a merger or an acquisition with smaller competitors, the terms of the deal usually include shares. This way cash flow to the smaller companies becomes smooth and effective.   

  1. Gives visibility and credibility

  Going public gives a company visibility and credibility. The public companies should be better professionally managed and fiscal data should be more transparent as they have to report it to SEBI periodically. Hence, to the world, the Company looks more credible.

  1. Improves pecuniary situation

  Selling a company’s equities to the public will generate a lot of liquidity and capital, which can be used for a better future of the company. Hence, the company will be in a more stable financial situation to apply for loans or to negotiate the terms of loans.

• What are the disadvantages of going public?

  1. Laborious decision making process

  When you sell too much of your shares, and your shareholders elect the majority of the board of directors , all decisions need approval by the board members or at least the majority of the share holders. Earlier the decision-making process which finished within a few hours in the meeting room, will now, take days. How much ever you try to keep your focus on the actual business goals, the stockholders who hold minimal shares individually, on coming together, can pressurize you to move away from it.

  1. Reporting costs will go high

  The Public company information will have rolling costs for periodic reports and proxy statements that are filed with the regulatory agencies and distributed to the shareholders. The company should do audits and any other public company compliance procedures. Every procedure and a report has a cost attached to it.

  1. Soaring upfront cost

  Offering shares to public is not cheap at all; it has a huge upfront cost. It involves under-writers commission, accounting and legal fees, printing charges, road show expenditures, advertising costs and registration fees. Management and accounting system must be upgraded. The departments which handle pesky analysts and you need to get qualified people to sit on your company’s board.

• Conclusion and Suggestion:

  Companies typically go public to raise huge amount of capital in exchange for securities. Once a private company is convinced about the need to become a public company, it kick-starts the process of IPO. Companies which want to go public follow a process that exchanges adhere to. The IPO process is quite complicated.

  So, what are steps to tread to make an initial public offer? One should note that the entire IPO process is regulated by the ‘Securities and Exchange Board of India (SEBI)’. This is to check the likelihood of a scam and protect investor interest.

  Step 1: Hire an investment bank

  A company seeks guidance from a team of under-writers or investment banks to start the process of IPO. More often than not, they take services from more than one bank. The team will study the company’s current financial situation, work with their assets and liabilities and then they plan to cater to the financial needs. An underwriting agreement will be signed which will have all the details of the deal and the amount that will be raised, the securities that will be issued. Though the under-writers assure on the capital they will raise, they won’t make promises. Even the investment banks will not shoulder all the risks involved in the money movement.

  Step 2: Register with SEC

• The Company and the under-writers together file the registration statement which comprises of every fiscal data and business plans of the company. It will also have to declare how the Company is going to utilize the funds it will raise from the IPO and about the securities of public investment.
  If the registration statement has compliance to the stringent guidelines set by the SEC, which ensures that the company has disclosed every detail a potential investor should know, then it gets a green signal.
  Else it is sent back with comments. The company should then work on the comments and file for registration again.

  Step 3: Draft the Red Herring document

  An initial prospectus which contains the probable price estimate per share and other details regarding the IPO is shared with the people who are involved with the IPO. It is called a red herring document because the first page of the prospectus contains a warning which states that this is not a final prospectus. This phase tests waters for the IPO among the potential investors.

• Step 4: Go on road show

  Before the IPO goes public, this phase happens over an action-packed two week. The executives of the Company travel around the country marketing the upcoming IPO to the potential investors, mostly QIBs. The agenda of the marketing includes presentation of facts and figures, which will drum up the most positive interest.

  5: IPO is priced

  Based on whether company wants to float a fixed price IPO or Book Building Issue, the price or price band is fixed. A fixed price IPO will have a fixed price in the order document, and the book building issue will have a price band within which an investor can bid. Number of shares that will be sold is decided. The Company should also decide the stock exchange where it be going to list their shares. The Company asks the SEC to announce the registration statement effectual so that purchases can be made.

  Step 6: Available to public

  On a planned date, the prospectus and application forms are made available to public online and offline. People can get a form from any designated banks or broker firms. Once they fill in the details, they can submit them with a cheque. Or they can submit it online as well. SEBI has fixed the period of availability of an IPO to public, which is usually 5 working days.

• Step 7: Going through with the IPO

  After the IPO price is finalized, the stakeholders and under-writers work together to decide how many shares will every investor receive. Investors will usually get full securities unless it is oversubscribed. The shares are credited to their demat account. The refund is given if the shares are oversubscribed. Once the securities are allotted, the stock market will start trading the Company’s IPO.