An IPO (Initial Public Offering) is the process by which a privately held company becomes publicly traded by offering its shares to the public for the first time. Through the IPO, the company gets its name listed on the stock exchange. If you’re an investor of such a company, you can earn dividends when the company profits, as well as capital returns, if the demand for its shares increases.
A private company has two choices: either remain private or go public. The Securities and Exchanges Board of India (SEBI) has laid down requirements that need to be fulfilled before launching an IPO, including disclosing a company’s financial records to the public. So, why do companies choose to go public? Let’s find out.
1. Raising Capital
The most distinct advantage for a company to go public is to raise capital. A private company can finance its operations through private funds from shareholders, investors, VCs and others. However, it can reach a stage where it needs a larger influx of capital to scale-up operations, expand, or a myriad of other reasons.
The go-to move in such cases is to approach shareholders and investors first. If they are unable to offer the funds, then the company has to consider other options. You might think banks are the most obvious choice, but there’s a limit to the amount of funds that they can offer based on their analysis of the company. Moreover, interest rates are something that might affect the company’s finances too. Hence, companies choose to go public. Investors can see a company’s financial performance before buying their shares.
2. Liquidity for Existing Shareholders
An IPO also may be used by founding individuals as an exit strategy. Seveeral venture capitalists have used IPOs to cash in on successful companies that they helped launch. Another advantage is that public awareness of the company increases. This is because IPOs create publicity by making their products known to a new group of customers. Once the company’s stocks are listed on the exchange, the price varies based on the general investor’s opinion of the company’s performance. All the effort made by the shareholders and/or employees in making the business successful gets paid back. This increases liquidity for existing shareholders.
3. Improves the Credibility of the Company
Since SEBI requires that all companies report their financial data periodically, it ensures that the company has better management and transparency. This, therefore, enhances its credibility.
4. Helps Assess the Company’s Market Worth
Any stock that is listed on the exchange is only worth what the investor is willing to pay for it. This gives you an idea of the company’s market worth. A company with a good market worth can ensure that it has better options for acquisitions and mergers.
5. Offers Greater Market Visibility
When a company launches an IPO, it gathers attention from the public. This, in the end, helps it gain market exposure.