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Why Do Companies Go Public

31 Jul 2023

Introduction:

Going public refers to the process through which a company launches an Initial Public Offering (IPOs), and then gets itself listed on the stock exchanges. During this process, the company's equity shares are sold to public investors for a specific price. 

But why do companies choose to go public and what are the benefits of doing so? Continue reading this article to find answers to all such questions.

6 reasons for Companies to go public

Below are the six mainstream reasons for companies to go public:

Raise money for business operations

This is a primary reason why most companies choose to go public. By selling their equity shares to public investors, they can generate a lot of wealth. They can use this money for various business requirements, such as paying off debts, infrastructure development, launching new products, investing in research, and other general corporate purposes.

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The amount of money that can be raised through an IPO depends on the issue size. It is calculated by multiplying the total number of shares released by the company with the issue price of one share.

Liquidity for private investors and employees

Until a company goes public, its shares are usually held by private equity investors and numerous other stakeholders, such as the founders, promoters, etc. Sometimes, companies also offer a certain portion of their equity ownership to their employees as a reward for their hard work and dedication.

When a company goes public, and its shares are made available for trading at the stock exchanges, the existing shareholders and employees get a chance to liquidate their shares in the form of cash. They can free offload all or some of the shares they hold by selling them on the stock exchanges.

Undertake mergers and acquisitions

Often, large companies need to acquire or merge with other smaller companies. This is done for several reasons, such as eliminating the competition or expanding business verticals. Usually, companies use the money raised from an IPO to undertake mergers and acquisitions. 

Additionally, when a larger company acquires one or more smaller companies, they need more capital to ensure smooth and effective operations. A successful IPO enables a company to raise significant funding from public investors. 

Provides visibility and credibility

Another crucial reason for companies to go public is they want to increase their credibility and visibility. When a company decides to go public, it is required to file a Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI), mentioning its IPO objectives, strengths, weaknesses, financials, etc.

This data is then made available to the public so that they can analyse whether they should invest in the company or not. Moreover, after the listing, a company has to report its financials to the SEBI at specific intervals. This, in turn, makes a company more transparent and enhances its credibility in the eyes of prospective investors as well as customers.

Improves financial position

Every company needs funding from time to time to grow and expand. Applying for a business loan is an easy way to get this funding. However, whenever a company applies for a business loan, the lender looks at its financial stability to grant it.

A company can generate a lot of wealth by selling its equity shares to the public. It can use this wealth for maintaining business operations and fuelling its long-term growth. Subsequently, its financial stability and position also improve, allowing them to request business loans from lenders and negotiate on loan terms.

Better public image

Going public allows a company to gain more exposure and recognition. This, in turn, helps in creating a better public image. Prospective customers automatically trust their products and services when they see a company listed on the stock market. Subsequently, a company’s sales volume and revenue start surging.

To conclude

There are numerous advantages for a company to go public. As an investor, you can invest in the IPOs of growing companies to seek long-term profits or even short-term listing gains. However, you must carefully analyse a company’s fundamentals before subscribing to its IPO.

If you need a Demat account to subscribe to an IPO, you can open it for free with Motilal Oswal.

 

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