this article exclusively discusses the features, grounds for rejection and benefits of a public listed company.
Publicly listed companies, also known as publicly traded firms, have their shares listed on any of the stock markets that allow the trading of their shares to the general public, i.e., anybody can sell or buy the shares of these companies on the open market.
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It is a firm that has been listed on a minimum of one public stock market and has offered securities to public investors for a stake in the company. The company goes public through an Initial Public Offering, which the Securities and Exchange Commission must approve from any country.
A specific number of the shares are made available to the public limited company, while the dominant shareholder retains control. Going public involves entering the secondary market. Trading between investors can impact the overall value of the company. Due to the high cost of financing, most privately owned companies choose to go public after meeting all regulatory requirements. Procter & Gamble, Google, Apple, Tesla, and other publicly traded corporations are a few examples of public listed companies.
Characteristics of a Public listed company
A company’s existence is unaffected by its stockholders’ retirement, death, or insolvency because it is an independent legal entity. These are the features listed below of the public listed company:
- The company has a separate legal existence from the individuals that comprise it.
- Its formation, operation, and termination are all firmly regulated by rules, regulations, and laws.
- A corporate member’s responsibility is limited to the market value of their shares. He is under no duty to contribute anything to the company’s creditors once he has paid the full face amount.
- A company’s shareholders do not have the privilege of participating in the daily monitoring of the company’s business. This guarantees that ownership and administration remain distinct. The Board of Directors holds a firm’s decision-making authority, and all policy decisions are decided at the Board level using the majority rule. This makes sure that management is on the same page.
- A business must have at least seven members, but there is no restriction on the maximum number.
- The corporation raises funds by selling shares, and the people who buy them are known as members. The sum collected is known as the share capital.
- A company’s shares are freely transferable without the permission of other stakeholders or successive notice to the company.
Benefits of a Public Listed Company
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Acquire funds
Companies will obtain significant capital through an initial public offering and subsequent investment rounds to finance general corporate operations, expansion possibilities, R&D, marketing, and capital expenditures.
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Employee Attraction and Retention
Companies can use stock grants and public stock option programs to attract specific employees with lower risk tolerance. Employees can get new stock options or participate in discounted stock purchase programmes.
Some employees choose to work for larger public firms rather than startups, yet as early-stage pre-IPO investors, entrepreneurial employees can earn higher stock awards.
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Corporate Debt Reduction
Public firms may discharge debt through the IPO or later share sales to lower interest costs and increase cash flow and debt to equity ratios.
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Mergers and Acquisitions
With a higher valuation, the company’s stock can be used to accomplish corporate mergers and acquisitions deals with more cash or fewer shares exchanged. Cash proceeds for mergers and acquisitions can be raised through an IPO or future stock offerings. Mergers and acquisitions success leads to synergy and growth in corporate sales and earnings.
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Keeping Corporate Identity and Increasing Visibility
When a corporation opts for an IPO as an exit option rather than being bought by another company, it keeps its corporate name and position. The corporation’s continued existence as a parent business and its name recognition may have significance for the company’s founder.
Drawbacks of a Public Listed Company
Companies that choose to go public confront not only huge prospects for growth but must also cope with the drawbacks or obstacles involved with the shift. Here are the obstacles that these sorts of companies could face:
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More accountability and transparency
Stockholders want regular accounting reports to understand how their shares are performing. They must be completed within six months after the fiscal year’s conclusion. Annual general meetings need to be held to demonstrate your accountability to a larger number of persons than previously. Typically, public limited corporations are held accountable and audited more thoroughly.
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Exposed to Takeovers
It’s beneficial to spread the risk but also makes your organization open to takeovers. This is especially important if a majority of shareholders approve a takeover attempt. It is considerably more difficult to control who is a stakeholder in your firm. Thus you may lose the overall direction of your corporation.
SEBI’s Factors for Rejecting the DRHP
- If no one knows who the ultimate promoters of the corporation applying for the IPO are, SEBI has the authority to reject the Draft Red Herring Prospectus for the IPO.
- The company is raising cash for a function unclear to SEBI and not listed in the DRHP.
- The issuer’s business strategy is overstated, complex, or misleading, and investors cannot assess its risks, making forecasting the associated risks with the company’s future difficult.
- Before filing the draft offer paper, there was an unexpected rise in the business, and the responses to clarification questions for this unexpected increase in business were unsatisfactory.
- A lawsuit is being filed against the corporation, and the verdict will determine the company’s future survival.
Conclusion
Converting the company into a publicly listed company may be a significant task, and it’s critical to understand all of the ramifications of enabling the general public to invest in your company. The best method to understand the ramifications of going public is to consult with a business attorney who is familiar with the rules governing securities and initial public offerings and can explain the benefits and drawbacks of your company going public.
Get in touch with the experts at Vakilsearch to know more about a publicly listed company’s benefits.
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