Why Do Companies Go Public

Going public is a significant milestone in a company’s life cycle. It involves transitioning from a privately held entity to a publicly traded company by offering shares to the general public through an Initial Public Offering (IPO). This decision is driven by multiple strategic, financial, and operational factors. This comprehensive guide explores why companies go public, outlining the key motivations, the IPO process, and the consequences of listing on stock exchanges. It aims to provide readers, especially beginners and those with basic understanding, with clear insights into this important corporate event.

Companies choose to go public for several important reasons that support growth and business objectives.

Raising Capital for Growth and Expansion

One of the primary motivations for going public is to raise substantial capital to fund expansion, new projects, or reduce debt without incurring additional liabilities.

Enhancing Company Credibility and Visibility

Being listed on a recognised stock exchange boosts the company’s profile, enhancing credibility with customers, suppliers, and partners.

Providing Liquidity for Existing Shareholders

Going public offers liquidity to early investors, founders, and employees holding shares, enabling them to realise gains or diversify their holdings.

Facilitating Acquisitions and Strategic Partnerships

Public companies can use their shares as currency to acquire other businesses or enter into strategic collaborations more effectively.

Employee Stock Options and Talent Retention

Public companies can implement employee stock option plans (ESOPs), incentivising and retaining talent by aligning employee interests with company performance.

Regulatory Compliance and Transparency Requirements

Public companies must adhere to strict disclosure and governance standards, which, while demanding, increase investor trust and market confidence.

Board and Shareholder Approval

The company’s board of directors and shareholders must approve the decision to go public.

Appointing Intermediaries

Companies appoint investment banks or underwriters to manage the IPO (Initial Public Offering) process.

Regulatory Filings

A Draft Red Herring Prospectus (DRHP) is filed with the regulatory authority (like SEBI in India), outlining financials, risks, and business details.

Due Diligence and Valuation

Legal, financial, and business audits are conducted to assess the company’s readiness and determine share pricing.

Marketing the IPO

The company conducts roadshows and promotional activities to attract potential investors.

Listing on the Exchange

After the IPO is complete and shares are allotted, the company gets listed on a recognized stock exchange like NSE or BSE.

Going public entails significant responsibilities and operational changes.

Increased Regulatory and Disclosure Obligations

Public companies must provide regular financial reports, disclose material information, and comply with corporate governance norms.

Market Scrutiny and Investor Relations

Being public exposes companies to continuous scrutiny from analysts, media, and shareholders, requiring transparent communication.

Impact on Corporate Governance

Listing demands stronger governance frameworks, often resulting in the appointment of independent directors and audit committees.

Potential for Stock Price Volatility

Public companies may experience fluctuations in share prices, influenced by market conditions and external factors, which are often beyond the control of the company.

Despite challenges, going public offers tangible advantages to companies.

Access to a Wider Pool of Capital

Public markets provide access to a broad investor base, facilitating easier capital mobilisation in the future.

Improved Market Profile and Trust

Listing enhances brand recognition and trust among stakeholders, including customers, suppliers, and financial institutions.

Enhanced Ability to Raise Future Funds

Public companies can raise additional capital through follow-on public offerings or debt issuance more efficiently.

Employee Motivation Through Equity Participation

Offering equity incentives helps align employee performance with company growth, boosting morale and retention.

Listing is not without drawbacks, which companies must carefully consider.

Cost and Complexity of Regulatory Compliance

Maintaining compliance involves significant administrative costs, legal expenses, and disclosure requirements.

Pressure to Meet Quarterly Expectations

The need to report quarterly financials can lead to short-term focus, potentially impacting long-term strategy.

Loss of Control for Original Owners

Public shareholders gain influence, diluting founders’ control and potentially affecting decision-making.

Vulnerability to Market Fluctuations

Share prices can be volatile, influenced by external factors beyond company control, affecting reputation and valuation.

Going public is a strategic decision that enables companies to access capital, enhance their market presence, and achieve growth objectives. While it brings benefits such as liquidity and credibility, it also imposes regulatory responsibilities and market pressures. Understanding these factors helps stakeholders appreciate the significance and impact of public listings.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.