A public company is an organization with distributed ownership amongst general public shareholders through publicly-traded shares. Read on to know why a company decides to go public.
Going public is the step by which a private corporation transforms into a publicly traded organization. It refers to an Initial Public Offering (IPO) in which a firm becomes publicly traded and publicly owned. A firm going public is viewed as a sign of business development and can be a rewarding route for both the investor and the company.
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When a privately held firm decides to go public, investors can become shareholders and share in the company’s profits. Going public and then being listed on stock markets is a matter of reputation for firms, and it is an important milestone in a company’s life cycle. An initial public offering (IPO) can help a company’s profile. A firm, to go public limited company, interacts with a merchant banker, determines the number and value of shares to be issued, employs underwriters, and then decides whether or not to list its shares on stock markets.
Reasons Why the Company Decides to Go Public
The following are the elements that impact a company’s decision to go public:
- Obtaining Funding
One of the most typical motivations for a company to go public is to raise funds for the company. Raising cash can be used to grow corporate operations, invest in research, pay off debts, construct infrastructure, and so on. The goal is to have some funds to aid with future growth. The higher the capital, the more likely company expansion.
- Improved Reputation and Goodwill
When an organization goes public, it garners a lot of image and market attention from the common people. It is a great chance for an organization that has never been in the public spotlight to become very visible to attract greater possibilities, quality talent, and higher credibility. An IPO also generates a lot of goodwill and publicity for the organization.
- Acquisitions and mergers
Large firms regularly seek well-managed businesses for mergers or acquisitions. Furthermore, IPO revenues are used to fund mergers. A successful IPO gives a business value, reputation, status, and additional funds to fund any merger and acquisition transactions.
- Transparency in Pricing
The listing of the stocks will provide significant liquidity. Furthermore, it will increase the company’s financial stability and price transparency.
- Marketability and liquidity
When a company’s stock is listed on a stock market, its shares can easily be traded. The stock exchange is a platform for the purchase and sale of securities. As a result, listing a company’s shares allows it to engage in this trading venture. As a result, the shares remain easily tradable and liquid, enticing investors to invest in the company.
- Improved profitability of stakeholders
The company is expanding at an incredible rate due to a great brand image, a strong presence, and enhanced performance. As a result, the company’s stockholders may benefit from greater profitability and liquidity. Stakeholders will also be capable of earning more money from the company’s current shares for a prolonged period. As a result, if the company’s operations expand by leaps and bounds as a result of such an opportunity, it can be highly profitable to the shareholders.
Criteria for IPO Listing Eligibility
- The corporation should have net physical assets of Rs. 3 crores over the previous three years, with the same entity holding no more than 50% of the monetary assets.
- The corporation must generate a minimum-level pre-tax operating profit of 15 crores from the three most profitable years in the previous five years, calculated on a restated and consolidated basis.
- In each of the previous three years, the company’s net worth was at least Rs. 1 crore.
- The size of the IPO must not be greater than five times the company’s net worth before the IPO given by the company.
- If the corporation changed its name within the last year, at least half of its revenue must come from the newly called company’s commercial activity.
Advantages of Going Public
- More funds
Going public provides organizations with additional resources and liquidity to reinvest in their growth.
- Enhanced market value
Due to increased openness and liquidity, companies’ market values frequently increase after going public. However, this is not the case for every firm that goes public.
- Increased brand awareness and prestige
Going public can boost a company’s visibility, which can assist it in expanding even more.
Disadvantages of Going Public
- Escalated Liability
Bringing your organization public enhances the company’s and its officer’s and directors’ potential culpability for mismanagement. A public business is required by law to maximize shareholder profits and report operational information to its shareholders.
- Loss of control
The company’s proprietors could lose the business’s control. Owners must also exercise caution since IPOs exposes a large amount of data about the company’s operations and owners to the public, which may give competitors important information.
- Expensive procedure
The Initial Public Offering step is not cheap in and of itself. It includes legal, accounting, and registration fees, as well as the fees charged by the merchant bankers recruited for the purpose. There are also expenditures associated with the listing’s promotion, among other things.
Things to Think About Before Going Public
- Is the timing appropriate for your industry? If you declare your IPO during a slump in your industry, you should expect a chilly response. Making an IPO in a favorable environment for your industry will increase your chances of success.
- Is your company ready and prepared to commit fully to an IPO? The sooner an initial public offering (IPO) is made, the better its possibilities of success. IPOs that are postponed or “put on hold” are viewed negatively by the market.
- Could your organization survive the distraction of a public offering? An IPO typically necessitates substantial managerial attention for a minimum of six months.
Conclusion
Going public could be an excellent method for private companies to expand their potential. Companies with solid foundations can reap numerous benefits from going public because the stock market is influenced by investor opinion. A corporation going public is often regarded as a sign of expansion, which benefits its public image. This might be a successful prospect for the firm and the investors with the rigorous investigation and in-depth analysis.
Get in touch with the experts at Vakilsearch to know more about why a company goes public.
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