​​Why Do Private Companies Go for IPO in the Stock Market?

In this article, we will cover

1. What is an IPO?
2. How Does an IPO Work in the Share Market?
3. Importance of an IPO
4. Why Do Companies Go Public?
5. Disadvantages of Going Public
6. How Do Companies List in the Stock Market?
7. Types of Initial Public Offerings
8. Differences between Fixed Price Issue and Book Building Issue

An initial public offering (IPO) is a big step for any private company that wants to sell shares to the Public. It can have a lot of benefits, like giving shareholders access to a bigger pool of capital and making it easier for them to get their money out. But why do some businesses decide to go public while others choose to stay private? This blog post will discuss why private companies might decide to go for an IPO in the share market and the pros and cons of this choice. The blog post also discusses how an initial public offering (IPO) works and what companies need to consider before going public. This post will help you understand the world of initial public offerings (IPOs), whether you own a business, invest in stocks, or are just interested in how the stock market works.

What is an IPO?

Going Public also called an Initial Public Offering (IPO), is when a private company sells shares to the Public. This lets the company be traded and owned by the public. The securities that are being sold can be either equity or debt. Going Public on a stock exchange gives a company access to a larger pool of capital, making it easier for shareholders to get their money out. Companies may choose to go public when making money, and many want to buy their shares. Usually, an entrepreneur uses their savings and money from angel investors to start a business. As the business grows and starts making money, venture capitalists and private equity firms may be interested in giving it more. But if the business wants to grow and get more money, it may go public through an Initial Public Offering (IPO) (IPO). This process allows the company to sell securities to the public and be traded and owned by the public. This gives shareholders access to a larger pool of capital and better liquidity.

How Does an IPO Work in the Share Market?

Going public through an Initial Public Offering (IPO) is complicated and requires a lot of planning and compliance. A private company that wants to launch an IPO in the share market must be ready for more scrutiny from the public and follow the Securities and Exchange Board of India's rules (SEBI). A private company will hire an underwriter, usually an investment bank, to help them through this process. As a consultant, an underwriter helps the company set the initial price for the offering, prepares important documents for investors, and sets up "roadshows" with potential investors. This makes it easier and better for the company to handle the IPO process. Once the company and its underwriter have decided on an IPO price, the underwriter will give investors shares. The company's stock will start trading on a public stock exchange like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). This is the official start of the business as a public company. The underwriter is a key part of this process because they help the company set the initial price and gives investors shares, which lets the company's stock start trading on a public exchange.

Importance of an IPO

An initial public offering (IPO) is a big step in a company's growth because it lets the company raise money, gain credibility, and get more attention. One of the best things about an IPO in the share market is that it enables people to buy shares in the company and help it grow. The process of an IPO also ensures that prices are clear, allowing the public to figure out how much the company is worth and keep track of how it is doing. Follow-on Public Offerings are another way for companies already traded on the stock market to raise money (FPO). This is when a company that has already gone public through an IPO gives out more shares to the Public. This gives the company a chance to raise more money for various reasons and allows the Public to buy shares.

Why Do Companies Go Public?

There are many reasons a company might go public or have its first public offering (IPO). Here are some of the most common ones:

• Raising Capital 

When a private company goes public through an IPO in the share market, one of the main reasons is to get money to run the business. An IPO is a way to raise money that can be used for many things, like growing a business, investing in research and development, paying off debts, and building up infrastructure. The idea is to have a fund that can be used to help with growth and expansion in the future. The more money a business has, the more it can invest in new projects and chances, which can help it grow and be more successful.

• Improves Financial Position

With an IPO in the share market, a company can sell shares to the public and get a lot of money and cash. This money can be used to improve the company's chances of success and invest in growth. When getting loans or negotiating loan terms, a company that has gone public may also be in a better financial position. This is because public companies are often subject to more scrutiny, which can make lenders and investors more likely to trust them. Also, public companies have access to a large pool of capital that can be used to get loans and negotiate better terms.

• Liquidity for Private Equity Investors

One common reason for a private company to go public through an IPO is to give existing shareholders a chance to sell their shares. Many people, like the founders or private investors, hold shares in a private company. Some or all of these shareholders may want to sell their stakes in the company. An Offer for Sale, part of an IPO on the stock market, gives existing shareholders a way to sell their shares to the Public (OFS). This lets current stockholders cash out their investments by selling shares on a stock exchange, giving them access to cash for their holdings.

• Liquidity for Employees

An IPO in the share market can also give employees of a private company with stock options a way to get cash. Employees may not have many ways to sell their stock options in a private company. Instead, they may have to wait for an event like an initial public offering (IPO) to do so. Many unlisted companies time their IPOs to coincide with when employee stock options can be exercised. This helps employees get the most out of their stock options. This allows employees to use their options and get cash by selling their shares on the public market. So, employees staying with the company can get the most out of their stock options and cash from the IPO.

• Liquidity and Marketability

When a company goes public through an initial public offering (IPO), and its shares are listed on a stock exchange, it makes it easy for its securities to be bought and sold. A stock exchange is where people can buy and sell securities, so when a company lists its shares, it can take part in this buying and selling. This makes the shares easier to sell and more liquid, which makes investors more likely to buy a piece of the company. This can also help the current shareholders by making it easier for them to buy and sell their shares and giving them a better way to figure out how much the company is worth.

• Mergers and Acquisition

Larger companies often want to merge with or buy a well-run company or buy it outright. Also, companies can use the money they get from an IPO to pay for these deals. A successful IPO in the share market can give a company value, a good name, status, and more money that can be used to pursue mergers and acquisitions. The company's value and reputation can go up after a successful IPO, making it more appealing to potential buyers. The extra money can be used to pay for any such deal. This can be a good way for companies to grow and expand by buying from other companies.

• Price Transparency

Putting a company's shares on the stock market through an IPO can give shareholders and the company a lot of cash. This makes it easier for shareholders to buy and sell their shares and also makes it easier to figure out how much the company is worth. Listing shares can also help the company's finances stay stable and make prices easier to understand by giving the shares a public market. This allows investors and the general public better understand the company's value and performance, which can also build trust and credibility.

• Credibility and Branding

When a company goes public through an IPO on the stock market, it gets more attention and credibility. Also, the Securities and Exchange Board of India (SEBI) has strict rules and regular reporting requirements for public companies. This makes it easier for the public to access the company's financial information. This openness can help investors and the general public trust and believe in the company, which can be good for its reputation and future growth. Also, when negotiating, merging, or buying another company, having more open financial data can be helpful.

Disadvantages of Going Public

Going public through an IPO in the share market can have many benefits, but it's important to remember that there may also be some problems. Here are some things that could go wrong with going public:

• Huge Upfront Costs

Putting together an IPO in the share market can be expensive. There are underwriting fees, legal and accounting expenses, registration fees, and advertising costs. Companies may also need to hire specialised staff to handle the IPO process. These costs can add up and may use up a big chunk of the money from the IPO. Also, it's important to remember that the IPO process can take a long time and require a lot of planning and preparation, which can add to the cost of going public.

• Loss of Autonomous Control Over the Company

In a private company, shareholders usually have a lot of say over how the business is run and how it is run. But this level of control can be lost when a company goes public through an IPO. Even if the majority shareholders still hold a large number of shares, the minority shareholders can still impact how the company makes decisions. This can be hard for management and cause problems because the interests of minority shareholders may not be the same as those of the majority shareholders. Also, the company's management will have to answer to a larger number of shareholders, which can add to the company's requirements for compliance and reporting.

• Increases Compliance Requirements

When a company goes public through an IPO, it has to follow more rules and report more information. For example, the Securities and Exchange Board of India will require the company to have regular audits, send out financial reports every three months, and follow other rules (SEBI). The company will have to hire specialised staff and pay more money to meet these requirements. These costs can be high, including hiring auditors, lawyers, accountants, and other experts. Also, the company will have to spend money to make sure it follows all the rules and requirements for reporting, which can add to the costs of running the business.

How Do Companies List in the Stock Market?

To go public, a company must make an Initial Public Offering (IPO) and list its shares on a stock exchange. Companies must follow the rules set by the Securities and Exchange Board of India (SEBI), which is in charge of the market, before applying for an IPO. Once the IPO is approved, both individual and institutional investors can sign up for it on the stock market and buy shares in the company. It's important to remember that there are only so many shares to go around, and not all investors who sign up for the IPO will get shares. The process of giving out shares is done randomly to ensure it is fair and avoid favouring certain investors. After investors get their claims, the company's shares are put on the stock exchange so they can be bought and sold by anyone.

Types of Initial Public Offerings

Initial public Offerings (IPOs) are the first time a company sells shares to the Public. Both types of IPOs let a company sell shares to the Public to raise money and get more attention. A company that wants to go public on the stock market can do so through a Fixed Price Offering, a Book Building Offering, or both. There are two main kinds of IPOs:

• Fixed Price Issue

In a Fixed Price Offering, the price of the offering is set by the company and its underwriters after they look at the company's assets, liabilities, and other financial details. Using qualitative and quantitative factors, they use this information to set a fixed price for the offering. The fixed price could be less than the market value, making it more appealing to investors. The stock of the company may be revalued in a good way after the IPO. Investors often like this kind of offer because they think it's a good chance to buy shares at a lower price.

• Book Building Issue

There is no set price in a book-building offer, only a range or band of prices. The lowest price in the band is called the "floor price," and the highest price is called the "cap price." Investors can bid for the shares at the price they are willing to pay. The stock's final price is based on how the proposals are weighed. As the book is built, the demand for the shares is known each day.

Differences between Fixed Price Issue and Book Building Issue

Both offers have pros and cons, and companies will choose the best fit for their needs and goals.

Price	In a Fixed Price Offering, the price of the shares is set on the first day of listing and is written in the prospectus. In a Book Building Offering, on the other hand, only a price range or band is set at first. The exact price won't be known until after the bidding process.
Demand	In a Fixed Price Offering, the demand for the shares isn't known until after the offering period is over. In a Book Building Offering, on the other hand, the demand for the shares is known every day as the book is built.
Payment	In a Fixed Price Offering, investors must pay the full price of the shares at the time of bidding. In a Book Building Offering, however, payment can be made after the shares have been given out.

Benefits of Investing in IPOs for Investors

Investing in initial public offerings (IPOs) can give investors several benefits, such as:

• Ideal entry point: IPOs can give investors a lot of money back when the market increases. IPOs are a good way for investors to get quick and profitable returns on short-term investments or to get more money to invest in other things.
• Early advantage: Strong companies usually start trading at a premium, and their stock prices go on to be higher than their IPO price. Investors can get a head start when investing in an IPO because other people can't buy the stocks at the IPO price.

Bottomline

There are many reasons why private companies go public on the stock market. The main benefit of an initial public offering is that it lets a company raise a lot of money by selling shares to the public. This money can pay off debts, invest in new projects or products, or grow the business. Going public through an IPO can also make the company more visible, prestigious, and trustworthy. It can also give existing shareholders access to cash and let them turn their investments into cash. Overall, an IPO can be a smart move for a private company that wants to raise money, grow its business, and become more visible in the market. By opening a Demat account, you can use Samco's unique indicators to improve how you trade. Sign up right now to get access to important indicators that every trader should know.