A firm gets elevated to the status of a public limited company from a privately held enterprise when it sells its stake to the public. The major reason for a company's initial public offering (IPO) is to raise capital. The entire process of selling shares is referred to as a "public offer." Investors also have the chance to become shareholders in the firm and take a share in its earnings.
Apart from selling public stock, a business has numerous other alternatives for obtaining cash, such as borrowing, venture capital investment, and so on, to cover future operating expenditures or considerably extend its growth potential. Why does a firm choose to go public?
Let us list out the reasons due to which a private firm might become public
To improve the credibility of the company
The companies need to abide by the guidelines laid by Securities and Exchange Board of India before issuing their public offering on the Stock Exchange. As the company undergoes this process, it clears the financial holdings of the company and makes them transparent. The public believes that the company has been approved by SEBI and hence, its credibility in the market increases.
To liquidate existing stakeholder’s investments
Usually a private company has limited investors and as the business grows, the investors earn profit. But, the reputation and fame earned by the company can be monetized only after the company goes public. Because the prices of the shares, during bidding, goes up, if the investors have a good name for the company. Therefore, going public helps the existing investors to increase their profits and liquidate the investments made by them.
To introduce fresh capital into the company
A private company generally relies on its investors and shareholders to finance the expenses required for the growth of the company. Sometimes, the funds from the existing investors are not sufficient in comparison to the amount required.
In that case, the company can either go to the banks for loans, but the rate at which the bank is willing to provide a loan, may not be feasible for the company. Another option is to sell the shares of the company to the general public. This option is considered to be a more cost efficient way to generate funds.
To boost market visibility
Sometimes the investors may be unaware of the presence of the company. When the public offerings are advertised and launched, it gains attention from the public. The investors start exploring and analyzing the financial aspects of the company. This increases the market presence and in return might boost up the business and growth of the company.
Going public can help private companies realise their full potential in the future. Because the stock market is driven by investor sentiment, a company with strong foundations can reap a slew of benefits by going public. Getting listed by a company is traditionally seen as a sign of growth, which helps to bolster its image in the minds of investors.
