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?
Here are some in-depth reasons why companies go public and how IPO benefits the companies:
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
Its 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 its market liquidity; with this, it allows its 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.
Going public is certainly one measure that would not only strengthen a company's financial position but also help to make a mark in an increasingly competitive landscape of the dynamic Indian market.