Why Companies Go Public: Explained

A company can adopt various ways to raise capital. One such way is by ‘going public’. This means that the company is issuing shares to the general public for subscription, thus becoming a publicly-traded and owned entity. To be precise, this refers to a private company’s initial public offering (IPO). After the IPO, the shares of this company shares are traded on the stock exchange.

Individuals who are digging the internet to understand why companies go public can find this piece very helpful. Read on to know everything related to it!

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Why Do Companies Go Public?

Here is a list of reasons that work behind the idea of a company going public.

1. Raise Capital

One of the prime reasons for a company to go public is to raise capital. Bank loans come with high interest rates, which can burden a company in case there is a large amount of debt. Here, IPO offers companies a large sum of money in a cost-efficient way.

These entities can use the money gathered through IPO to clear debts, expand, etc.

2. Increase Credibility

The Securities and Exchange Board of India (SEBI) is responsible for regulating the stock market and has set stringent rules for activities in this arena. Therefore, when a company issues IPO, it means it abides by the rules of SEBI hence a reliable company.

In addition, demand and supply determine the stock price. Therefore, if a company’s share is selling at ₹ 70 and another company’s share is selling at ₹ 700, it reflects that the latter has more demand in the market. It helps to attract buyers and increase the chance of better mergers and acquisitions.

3. Boost Liquidity and Profitability for Stakeholders

When a company goes public, it can utilise brand value and goodwill earned throughout operational years. With a positive brand image, a company can trade its shares in large volume and earn more profits.

4. Make a Strong Market Presence

The launching of an IPO occurs every month. There might be cases where investors do not know about the launch of any IPOs. When a company issues an IPO, investors start researching about that company and scrutinise business and financial documents. This way, a company starts to make a strong presence among investors slowly.

5. Expansion Purposes

When a company gets huge funds, it can easily think of expanding its business by acquiring other small companies. Thus, that company can accelerate growth.

As individuals have learnt the primary reasons for a company going public, let’s focus on the ways of listing a company.

What Is the Process of Listing a Company?

A company willing to list itself in the stock exchange must follow the steps mentioned below.

Step 1

Make an appointment with an investment bank and pay fees. That bank will take the task of making the company public.

Step 2

Every company must register its IPO shares with SEBI. Here, companies have to prepare registration statements and Red Herring Prospectus (RHP). RHP contains all information on IPO.

Step 3

At this stage, SEBI will verify the disclosure of companies. Once approved, the company can announce the IPO date.

Step 4

Now, that company has to make an application to the stock exchange for conducting the initial issue.

Step 5

Companies need to focus on marketing and advertising over a period of two weeks.

Step 6

Next, the investment band must set a price band of IPO shares. Here, companies can compute through Fixed Price IPO or Book Binding Offering.

Step 7

After finalising IPO prices, allotment of IPO shares to bidders occurs, and the listing of shares is completed.

What Are the Requirements for Listing a Company on Stock Exchange?

The listing requirement for new companies is as follows.

The minimum post-issue paid-up capital of the applicant company must be ₹ 10 crores for IPOs and ₹ 3 crores for FPOs.
The minimum issue size must be ₹ 10 crores.
The minimum market capitalisation of the company must be ₹ 25 crores (The calculation of market capitalisation occurs by multiplying the issue price with the post-issue paid-up number of equity shares).

What Are the Advantages of Listing a Company?

Companies can enjoy the following advantages for listing themselves on the stock exchange.

Boost capital base
Diversify ownership
Make acquisition simple
Enhance prestige

What Are the Disadvantages of Listing a Company?

If a company goes public, it can face numerous disadvantages. These are as follows.

Increases costs
Limitations on management and trading
Forced to disclose activities to the public
Former owners lose control and decision-making ability depending on the number of shares issued

From the above discussion, individuals can clearly understand why companies go public. The process allows stakeholders to ensure enough inflow of funds and increase visibility in the market.

Frequently asked questions

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Can existing company shareholders utilise IPO (or going public process) as an exit strategy?

Yes, existing company shareholders can utilise IPO (or going public process) as an exit strategy.

Why is advertising important for companies going public?

Advertising is important for companies going public because this technique helps to attract potential investors.

How do companies conduct the advertising process while going public?

Applicant companies share and highlight their core ideas with business analysts and fund managers. These individuals then take various approaches such as multimedia presentations, group meetings, QA sessions, virtual roadshows, etc., to advertise for companies going public.