Why Does a Company Decide to go Public?

Initial Public Offerings, or IPOs, are immensely popular among Indian investors. In recent times, IPOs have brought many people into the stock market and investments, as the prospect of profits seems enticing to everyone. On the company’s end as well, there are several advantages of IPOs. Have you ever wondered why it looks like these big businesses seem to be in a rush to go public? In this article, we will delve into the world of IPOs to answer the fundamental question of why companies go public.

• IPOs enable companies to raise substantial capital to fuel expansion, repay debt, and support business growth.
• Going public increases marketability, liquidity, and trust, as companies must adhere to strict regulatory frameworks.
• IPOs provide early investors with an exit strategy and offer employees an incentive through Employee Stock Ownership Plans (ESOPs).

IPO refers to the first time when a private company issues shares to the public. This is known as ‘going public’. In an IPO, shares are offered to the public at predetermined prices. This provides an opportunity for investors to get in on the ground level of the business from the get-go and share in their profits.

The advantages for investors are clear. However, what are the advantages of IPOs for businesses? Let us take a look.

With the meaning and popularity of IPOs out of the way, let us learn about the advantages of IPOs for companies in detail. The most prominent benefits include:

1. Raising funds:

This is the main advantage of an IPO for a company. The firm wants to raise funds to fuel its expansion and growth and thus offers shares to the public. The financing that the company gets from its IPO can also be used to pay off debts.

2. Existing investor exit route:

There are several investors and promoters of a company that already own a substantial amount of its shares. One of the advantages of IPOs is that they enable these entities to liquidate their stake, completely or partially, through the offering. They can either directly sell their shares to the public or liquidate through an OFS (Offer for Sale).

3. Marketability and liquidity of shares:

Shares listed on the stock exchange can be traded easily. The exchange is a hub of equity trading. If your company’s shares are listed on the stock exchange, it essentially means that every market trader could buy or sell them. This significantly enhances the liquidity and marketability of your stocks, improving accessibility.

4. Enhanced stakeholder trust:

Listed companies also tend to garner investor trust as the firms have to comply with an additional set of regulatory frameworks created by SEBI to go public. As a result of this compliance, market participants gain access to a company’s financials, corporate practices, trading activities, and more. This directly contributes to investor trust as they get insights about businesses available in the public domain.

5. Takeover possibility:

Additional funding from the investors enables businesses to expand. Companies can also expand by taking over and acquiring other companies, which enhances their profits.

6. ESOPs are motivation for employees:

ESOP refers to the Employee Stock Ownership Plan. These are plans set up by the business to offer its stocks in an attempt to attract talent. For companies, this reduces the employee retention cost and the monetary compensation that has to be offered while bumping up the opportunities of onboarding talented candidates.

7. Better visibility:

When an IPO is listed on a stock exchange, it becomes open and accessible to a broad population. This directly enhances the company’s visibility and helps it garner attention in the market, directly adding to its reputation.

Going public through an IPO is a significant decision for any company. There are significant advantages of IPOs that go beyond merely raising funds. It enhances a company's market visibility, liquidity, and stakeholder trust while also providing a valuable exit strategy for early investors. Additionally, the advantages of IPOs extend to employees through stock ownership plans and the potential for business growth through acquisitions. The IPO process has its complexities; however, the rewards make it a strategic move for businesses seeking to expand, strengthen market presence, and secure long-term success.