A company has various means of raising capital to meet operational expenses or to grow its business. This includes issuing shares to people. When a privately held company decides to raise capital by issuing shares, it is called going public.
The process of issuing shares is known as a Public Offer. Through these offers, investors get an opportunity to become shareholders of the company and partake in its profits. However, with several other options available like loans, venture funding, etc., why does a company decide to go public?
Here are some top reasons:
A Cost-Efficient Way to Raise Capital
In a privately held company, the operations and growth processes are financed using funds from the shareholders, investors, and venture capitalists. While this can help a company get started, sometimes, it needs to scale its operations up or widen the range of services/products to keep up with the competition and requires a huge capital infusion.
If the existing investors/shareholders are unable to raise the required sum, the company has two broad options to choose from – avail of a loan or issue shares.
While loans can be easy to acquire if the company has assets, the interest paid on the loans can hurt its finances and make profitability difficult.
By going public, the company ensures that its capital requirements are met in a more cost-efficient manner.
Boosts Liquidity and Profitability for Existing Shareholders
In a private company, a limited number of shareholders invest capital to get the business rolling. As the company gathers customers and starts growing, the shareholders start earning profits.
However, the brand value and market goodwill earned by the business cannot be monetized until the company goes public.
When a company issues shares, the market price of its shares is based on the general investor’s perception of its performance.
Hence, if the company has a good presence and positive brand image, existing shareholders can earn more profits for their existing shares in the company. Also, shares of such companies trade in good volumes increasing liquidity too.
Enhances the Credibility of the Company
The Securities and Exchange Board of India (SEBI) regulates the stock market and has laid down some stringent norms to allow companies to go public.
Hence, if a company is launching an IPO, people can be certain that it has passed SEBI’s requirements and is hence a strong company. This helps improve its overall credibility.
The stock price is determined by the demand and supply of the said stock. Hence, if a company’s stock is selling at Rs.500 and its competitor’s stock is selling at Rs.50, then the former has more worth in the market than the latter.
This allows it to attract better employees and opens doors for profitable mergers and acquisitions.
Boosts Market Presence
IPOs are launched every month. Also, on many occasions, investors are unaware of the company launching the IPO and hear about it for the first time during the launch period.
As the company promotes and advertises its public offer, investors start researching the company, reading up on its business and financials, etc. This helps boost the market presence of the company. It can also use this buzz to grow its business.
There are a plethora of benefits that a company can derive from going public. However, a company needs to make this decision after carefully considering its requirements.
Also, investors need to understand why the company has launched the public offer and what it intends to do with the raised capital. Usually, a company going public is perceived as a sign of the growth of its business.
With careful analysis and in-depth research, this can be a profitable avenue for both the company and investors.
(Harsh Jain, Co-founder and COO, Groww)
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are his own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.