why do companies go public?

Why Companies Go for IPO: Reasons for Listing of Securities

A company going public receives a number of benefits by launching an IPO. Here are all the reasons why companies go for an IPO:

Raise Funds

The primary reason for a company to go public is to raise funds through an IPO. By listing shares on a stock exchange, a company can access a vast pool of capital from public investors. It can be used for expansion plans, acquiring businesses, or strengthening the company's financial position.

Liquidity and Marketability of Shares

An IPO enhances the liquidity and marketability of a company's shares. With a public listing, shares can be easily bought and sold on stock exchanges. This provides liquidity for both existing shareholders and potential new investors.

Exit Route for Existing Investors

Going public provides an exit route for existing investors. This includes venture capitalists, angel investors, or early-stage investors who have financed the company in its growth phases. These investors can liquidate a portion or all of their holdings through the IPO.

Better Public Image

An IPO is launched by a business in an effort to improve its public perception. It can significantly enhance a company's visibility and brand recognition, both domestically and internationally. The increased media attention and public scrutiny that accompany a public listing can raise a company's profile and potentially boost its customer base.

How Does a Company List in the Stock Market?

A company that decides to list its shares on a stock exchange and become publicly traded must go through the initial public offering (IPO) process.

• Hiring an Investment Bank (Underwriter): The company hires an investment bank or underwriters. They assist in determining the offering price and quantity of shares to be issued with due diligence.
• Regulatory Body Filing: The business drafts and submits a comprehensive statement to SEBI. It contains comprehensive details about the business, financial statements, and offering terms.
• Marketing: To promote the IPO to possible investors, the underwriters and the company's management start advertising. It helps pique interest and creates demand for the shares.
• Pricing and Allocation: The underwriters set the final offering price and distribute the shares to institutional and retail investors. This pricing is based on the input they received from investors during the roadshow.
• Trading Debut: Following the completion of the initial public offering (IPO), the company's shares are listed on a stock exchange NSE or BSE.

Advantages of Going Public

The reasons for which the company decides to go public are often the most prominent advantages of launching the IPO. An IPO can provide a private firm with the following benefits:

• Access to Capital: Going public allows companies to raise substantial funds through the sale of shares in the public market.
• Increased Liquidity: Public listing provides liquidity to existing shareholders. IPO allows them to easily buy or sell their shares on the open market. This increased liquidity can also attract more investors.
• Enhanced Credibility and Visibility: Public companies often enjoy greater credibility and visibility due to the stringent disclosure requirements and regulatory oversight. This boosts customer and investor confidence, as well as brand recognition.
• Acquisition Currency: Public companies can use their shares as a form of currency for acquiring other businesses or assets. This provides a more flexible approach to mergers and acquisitions.
• Employee Incentives: Public companies can implement employee stock ownership plans (ESOPs) more effectively. This assists in aligning employee interests with shareholder goals and potentially attracting and retaining top talent.

Disadvantages of Going Public

The process of transitioning from a private company to a public company has the following disadvantages:

• Loss of Control: Public companies must answer to a diverse group of shareholders, potentially leading to conflicts between management's vision and shareholder interests. This can result in a loss of autonomous control over decision-making.
• Possibility of Takeovers: Being a publicly traded company can make a firm a more attractive target for potential takeovers or acquisitions.
• Increased Compliance and Reporting Requirements: Public companies are subject to strict regulatory requirements. It includes periodic financial reporting, adherence to accounting standards, and corporate governance rules.
• Public Scrutiny: Public companies face constant scrutiny from regulators, analysts, and the media that can negatively impact the company's reputation and stock price.
• Dilution of Ownership: Going public typically involves issuing new shares, which can dilute the ownership stakes of existing shareholders, including founders and early investors.
  

Conclusion 

Even though an IPO can have significant advantages, businesses must also be ready for the challenges that come with being a public company. In the end, the decision to go public should be well thought out, taking into account the company's long-term objectives and growth strategy. It must also set the company up for long-term success in the public markets.