Why do Companies go Public and Launch its IPO?

Quick Read

Going public marks a corporate hallmark. In India, an IPO is the mode through which this is achieved. The definition of an IPO is the initial issuance of corporation shares to the public on a securities exchange. Many businesses use this as a means of raising capital and expanding their operations. What motivates the companies to take such a giant leap?

Companies launch an IPO to raise capital, expand their business and access a wider pool of investors through the public markets. Going public can improve liquidity for existing shareholders, strengthen brand recognition and enhance corporate governance. Understanding why companies go public helps investors appreciate how IPOs support business growth while creating new investment opportunities.

• Access to Capital

  
  The primary reason to go public for companies is that they need capital. The new IPO listing provides businesses with access to a huge pool of investors. The buyers can be institutional investors, retail investors, or foreign participants. Money fetched from the public helps companies meet costs that are needed to incur towards various activities such as:
  - Increasing operations
  - New products
  - New markets
  - Purchasing other companies
  
  Accessing capital from the public market is also relatively cheaper compared to private equity or debt funding. Once a company is listed publicly, it can also float more shares to source more capital.

• Increasing Liquidity

  
  Going public can also provide liquidity to existing shareholders, which may involve founders and early investors. This will enable them to sell a portion of their stakes and thus give them a possible opportunity to gain profits. Other than that, workers with stock options will also see how their shares become marketable on the open market. More investors would get attracted towards increased liquidity, which could eventually increase the price of the company over time.

• Brand Recognition Enhancement

  
  An IPO is always accompanied by significant publicity from media houses and other relevant stakeholders, which can help enhance the corporate visibility. Listing the company in the stock exchange would normally boost the brand image by making it more authentic to the customers, partners, and potential employees. Public companies enjoy strong reputations that are likely to open windows for them in terms of business partnerships, mergers and acquisitions, and talent acquisition.

• Improvement in Corporate Governance

  
  Once a company goes public, it will have to follow strictly the rigorous regulatory and compliance requirements stipulated by SEBI. This includes transparency in financial reporting, observance of the standards of corporate governance, and regular disclosures. For many companies, such strictures lead to better internal processes and stronger governance practices. Investors often prefer companies that have strong governance practices because it builds investor confidence and is more likely to attract long-term investments.

• Diversification of Ownership

  
  Besides building a large pool of funds, going public takes ownership away from a few private investors and brings it into the diversified numbers of shareholders. This makes the risk factor to the preliminary owners reduced. With the diversification of ownership into multiple groups of investors, the company makes sure that no one entity is so powerful. In this way, the business becomes stable in the long run.

• Attract and Retain Talent

  
  Attract and retain top talents usually in public companies use stock options and equity-based incentives. Such incentives position employee self-interest with that of the company; employees have a stake in working to ensure the success of the company. Employees will have a greater stake in a firm when they have a financial stake in its future prosperity.

• Encourage Mergers and Acquisitions

  
  For its part, a public company can freely use its stock as currency for mergers and acquisitions. Hence, the firm can acquire other businesses using shares instead of cash; this is an excellent tool to expand quickly without putting too much pressure on its cash reserve. Finally, the higher valuation can also be used as a leverage tool in making a deal.

• Establishing a Market for Shares

  
  The company shares can then be quoted on a stock exchange, either on Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE), once it has gone public. This increases the company’s market liquidity and the shareholders to buy and sell their shares with ease. Liquidity makes the company more attractive to the investors because it provides the investors with an opportunity to exit.
  
  Going public opens up a lot of benefits for companies, such as the raising of capital, improvement of corporate governance provision of financial resources needed for growth, and enhanced brand recognition. The process requires compliance, which may sometimes appear challenging, but the benefits are usually more than the challenges. An IPO is the most obvious step, that spells out the further growth or long-term sustained success for many businesses.
  

Disclaimer: This article is for educational purposes only and should not be considered investment advice. Investors should evaluate a company's objectives, financials and risks before investing in an IPO.