You may have often seen news reports announcing that a company has gone public. Following this, terms such as IPO, share price and details of the company, such as its profits and growth prospects, are discussed passionately on various platforms. But what does going public mean for a company? Let us look closely at what an initial public offering (IPO) is and when and why a company decides to launch an IPO.
What is an IPO?
An IPO marks the first time that shares of a company are made available for purchase by the public through new stock issuance. Before an IPO, a company is considered private, meaning it has grown with a relatively small number of shareholders, including early investors such as the founders, family, and friends, as well as professional investors like venture capitalists or angel investors.
A company launches an IPO to raise equity capital from public investors. It helps the company amass the necessary funds to support its growth and expansion.
When does a company launch an IPO?
A company typically launches an IPO when it believes it has reached a stage in its growth process where it is equipped to handle the regulations and responsibilities that come with being a publicly traded company.
In India, the company that intends to launch an IPO must be able to meet the requirements specified by the Securities and Exchanges Board of India. For instance, in addition to being registered with SEBI, the company should have at least shareholders, a share capital of Rs 5,00,000 (minimum) and at least three years of profit, among other conditions.
Going public through an IPO is a significant step for a company, as it brings increased transparency and credibility to its shares, which can also help it secure better terms when seeking borrowed funds.
For private investors, an IPO can be a valuable opportunity to realise the gains from their investment fully. This is because an IPO typically includes a share premium for current private shareholders, which allows them to benefit financially from the company’s success. Public investors are also allowed to participate in the offering, allowing them to become shareholders in the company.
Advantages of IPO
There are several benefits of going public through an IPO. Here are some of them:
Increase capital: It empowers the company to raise capital. IPO allows a company to raise a large sum of money that can be used for various purposes, such as paying off debts, investing in research and development, and expanding the business. IPOs are often considered a more cost-effective and less risky method of acquiring funds than applying for bank loans.
Greater exposure: IPO can help enhance the company’s public image, allowing for greater exposure and recognition. This can increase trust in the company and its products and services. Positive public image, in turn, makes it easier for the company to engage in mergers and acquisitions and improve cash flow through the public listing of shares.
Transparency: Price transparency is another advantage of an IPO. The sale of equities generates liquidity, which can help to stabilise a company’s financial condition and increase price transparency. This can also create a liquid entity for long-term shareholders. The increased visibility and transparency of financial data can meet the requirements of regulatory bodies such as the SEBI and improve the company’s overall credibility.
Apt assessment: With IPOs comes an accurate assessment of a company’s value. Once a company’s stock is listed on an exchange, its value is determined by the price investors are willing to pay. This can provide valuable information for a company looking to grow and engage in mergers and acquisitions.
Bottom line
An IPO is a significant milestone for a company as it allows the business to raise capital and gain credibility and exposure. One of the most significant aspects of an IPO is the involvement of the public in the company’s growth. Through price transparency, the public can assess the company’s value, providing a measure of protection against potential downturns.