Personal Finance

Why do companies go public?

February 4, 2021

Why do companies go public?

The primary reason companies go public is to raise capital. When a private company decides to raise equity capital by offering its shares for sale to the public for the first time, it is known as a “going public” and the entire process of offering shares is called a “public offer”. At the same time, investors get an opportunity to become a shareholder of the company and partake in its profits.

Apart from issuing shares to the public, a company has several other options available for raising capital to meet future operational expenses or to significantly expand its growth potential like borrowing, venture capital funding, etc. Why does a company then opt to go public instead?

Here are a few key reasons due to which a privately owned company launches an Initial Public Offering (IPO):

Cost-Efficient Way of Raising Capital

A company only has a few options to select from for raising capital like venture capital funding, availing loans, or issuing shares.

Most companies face difficulties in raising equity capital from venture capitalists as potential investors may not give a fair market value to the entrepreneurial venture. Similarly, loans from banks are an obvious choice if the company has assets, but the interest rates can hurt the company’s finances.

In such instances, it is wise to seek equity investment from the public who might value the company based on its perception, thus being a more cost-effective way of raising capital.

Strengthens the Credibility of the Company

SEBI – Securities and Exchange Board of India, a body that regulates the overall process of investment via an IPO and has decreed some rigid norms to allow companies to go public. Hence, If a company is launching an IPO, it has passed SEBI’s requirements and is deemed a well managed and strong company. This makes the company robust and more credible in the eyes of the investor. It also allows in attracting and retaining better talent and unlocking the doors for profitable mergers and acquisitions.

Boosts Brand Image

While launching the IPO, a company promotes and advertises its public offering. Investors start exploring the company and reading up on its business, products, services, financials, etc. This not only helps increase the market presence but also boosts the brand image. The company can also use this buzz to attain growth in its business. Moreover, financial institutions are more willing to lend to listed companies than to unlisted firms.

Enhances Liquidity and Profitability

The promise of increased cash and liquid assets is another important benefit of going public. When the company goes public, its brand identity becomes stronger and this strong presence attracts more investors. This creates a market for existing shareholders to cash in on the opportunity by selling their holdings, thus uplifting the overall liquidity of the shares and eventually leading to the shares being traded in good volumes. It also augments the wealth of shareholders by allowing publicly traded shares to be used as market collateral for loans.

Final Verdict

Going public can be a great way for private companies to enhance their future potential. Companies with strong foundations can garner a plethora of benefits by going public as the stock market is driven by investor sentiment. Conventionally, a company going public is adjudged as an indication of growth, thus aiding in its public image. With careful research and in-depth analysis, this can be a profitable opportunity for both the business and the investors.