One of the most common headlines in newspapers these days is about companies going public and getting listed. Over the past few decades, an increasing number of companies have been transitioning from private shareholding to public shareholding, and doing so by launching an Initial Public Offering (IPO). In this article, we shall discuss the meaning of an IPO and the key reasons for companies to go public.
IPO meaning and types
The meaning of an IPO is the first public offering for the shares of a company that was previously held privately. When a company decides to get listed on a stock exchange, it has to invite public subscription to its shares, and the process of doing so is termed as an IPO. A company can either opt for a Fixed Price IPO and have a fixed offer price for its shares or choose a Book Building Issue and offer a price band for the shares.
Key reasons for companies going public and opting for an IPO
With the IPO list for each month and year flooded with companies across sectors, the pertinent question is: Why do companies decide to go public? Here are some of the main reasons for companies going public.
To enhance its sources of raising capital: If there is one thing every company requires, irrespective of its scale and sector, it’s capital. After a point in time and after reaching a certain scale of operations, the sources of capital available for a private company become extremely limited and inadequate. Therefore, becoming a listed entity is a feasible option for companies looking to enhance their avenues of raising capital.
To offer its promoters an option to exit: Another key reason for companies to launch an Initial Public Offering is to offer an exit route for its promoters and other existing investors. If an IPO is purely intended to divest promoters’ capital without the issuance of any new shares, it can take the shape of an Offer for Sale (OFS). The promoters can sell their shares through such an IPO and exit their investment from the company.
To increase public awareness about its operations: There is a significant amount of marketing to publicise an IPO. From newspaper and television advertisements to billboards, several forms of physical and digital media are deployed to make the public aware about an IPO. Such efforts are particularly important for companies that are not household names. By launching an IPO and taking the first step towards becoming a listed entity, a company can enhance its public presence.
To enhance the liquidity of its shares: As long as a company is privately held, its shares have minimal, if any, liquidity. The process of becoming a listed corporation also enables a company to increase the degree of liquidity of its stock. Once the IPO process is complete and the shares get listed on a stock exchange, they can be freely traded in the open market and the price shall be determined by the forces of demand and supply.
To be perceived as transparent and compliant to SEBI regulations: The regulations governing public companies are wider than the corresponding regulations for private companies. A company may choose to launch an IPO and become a public company to comply with a wider set of Securities and Exchange Board of India (SEBI) regulations, and be perceived as a transparent and credible organisation. This can help said company enhance its reputation amongst existing and prospective stakeholders alike.
The bottomline
Different companies may have different reasons for going public and issuing their shares to the public through an Initial Public Offering. We hope the above information on the meaning of IPO, types of IPO, and the major reasons for companies going public is informative.
