In the financial world, companies prefer to go public to offer or sell business securities to retail investors or other types of investors. So listing a company opens a door of opportunity, or you can say that it revolves around a company. The listed securities on the stock exchange can be equity or debt securities. Through this process, a company can achieve a win-win situation if the goal of an IPO is achieved in the projected time.
Through this process, the companies become entities that can be publicly traded and owned by a group of investors. Companies decide to go public to earn profits and capital returns, and if public demand increases, so does the share price. This process of listing shares in the publicly traded market is known as the Initial Public Offering.
At the beginning of any business, there are investors who seek opportunities in a business and expect a good return. But often, those angel investors and other early investors can only help scale up the business to a certain extent. To tackle this problem, the company decides to go public and launch its IPO.
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Why Do Companies Go Public?
Suppose you start a business with a debt of 40% of your total investment. After running a business for several years and making good returns, you want to expand and have an investment that will not come with a debt trap or high-interest rate. As the company continues to grow, there is a good chance of a better future. As a result, the company may decide to go public as its valuation rises and its business expands. There will be a joint discussion with the directors regarding the company going public. To go public, the company needs to hire a professional, such as an investment banker or underwriter, who can guide and help the company list its IPO.
How to Take A Company Public?
Companies can list on a registered stock exchange by following the IPO process and the SEBI guidelines. To elaborate on why companies go public, you can understand the norms and regulations that are strict and beneficial for both investors and the listing company.
As the IPO is announced, investors need to know that there will be a limited number of shares issued in the IPO. Every investor who applies for an IPO may not get the allotment of shares. This allotment process is done with a random process to ensure there is no bias or wrongdoing in allotting the shares. After the shares are allotted to the investor, they will be listed on the stock exchange to trade freely in the stock market.
Pros of Taking Companies Public
There are multiple reasons why companies go public. Some of the benefits of going public for private companies include:
Get More Fund
As the primary goal of a listing is to get more and more funds, the company can issue new shares in return for capital to be used in the growth and expansion of the business. When the shares are subscribed, there is a significant inflow of funds from the market, which gives the advantage of meeting a significant amount of financial needs. These funds can also help reduce the debt burden and high-interest loans for the company.
Exit For Private Investor
As the share of private companies is mostly in the hands of several stakeholders, such as private promoters or investors. If a private investor wants to liquidate their holding, their stake can be partially listed on the stock exchange through the IPO. The listing provides an easy solution for liquidating investor funds. As a result, existing shareholders of a company can easily sell their shares to the general public via an offer for sale (OFS). This listing can be a safe option for the existing shareholder to exit the company.
Part Of Stock Exchange
Because a company's stock is traded on the stock exchange, it is easily traded and held or owned by a number of investors. The stock exchange is a hotbed for buying and selling securities, and allowing a new company's share in the stock exchange is like the cherry on top. The share will be easily available for trading and motivating new or experienced investors to invest their own stake in the company.
Listing in the IPO creates a huge brand awareness campaign. The marketing of an IPO is a great attention seeker for potential investors, whether they are individual investors or institutional investors. It creates a public profile for the company and can also play a crucial role in enhancing goodwill and brand reputation in the market.
As we discuss all the pros of an IPO, the rules and regulations of SEBI ensure tight control over the company's financial disclosure, debt ratio and corporate practices. The goal of SEBI is to eliminate any chance of error, malpractice and other illegal activities in the financial market. This boosts the confidence and trust of investors to invest in the stock market.
Cons Of Taking Companies Public
Just like every cloud has a silver lining, there are some disadvantages for companies going public. These are the following.
Lots of paperwork
Unlike private companies, public companies need to file financial statements for each year. The financial controls must be thoroughly audited, and the financial statement must be submitted to the SEBI by the reporting teamThe paperwork, time, and cost will be higher for a private company.
When a private company goes public, they lose full control. Control is now shared by the investor and the shareholders. The founder or director cannot enjoy autonomous power over the business anymore. They need to involve investors in crucial decision-making regarding the future of the company.
An IPO is an important phase for a private company to become public. It deliberately enables the need for funds. In addition to this, it also plays an important role in the growth of the company. A successful IPO will help both companies and investors. It's crucial for companies to maintain transparency, which is maintained in the process. Therefore, if you want to evaluate the risk and reward of any IPO, you can prefer a broker such as Share India. It provides an in-depth report on IPO companies.