Why Do Companies Go Public & Launch Their IPO?

Introduction

Imagine a company that started in a garage or a small office, with a handful of employees and a big dream. Over the years, it has grown, attracted more customers, and reached a point where it needs a significant boost to take it to the next level. This is where going public and launching an Initial Public Offering (IPO) comes into play. Companies going public is not just a financial move; it's a transformational step that can redefine a company's future. 

But why do companies take this leap? What benefits do they gain, and what challenges do they face? In this article, we will dive into why companies go public, the detailed process involved, and the pros and cons of this monumental decision.

Listing of Securities – Why Companies Go for IPO

Companies go public primarily to raise capital. By launching an IPO, a company can sell its shares to the public and generate funds for various purposes, such as:

• Expansion: Financing new projects, entering new markets, and scaling operations.
• Debt Repayment: Reducing the company's debt burden to improve financial health.
• Research and Development (R&D): Investing in innovation and new product development to stay competitive.
• Marketing and Branding: Enhancing brand visibility and attracting new customers.

Another crucial reason for going public is to improve the company's visibility and credibility. Being listed on a stock exchange increases the company's profile, which can attract new customers, partners, and talented employees. Additionally, it provides liquidity for existing shareholders, allowing them to sell their shares and realize their investments.

How Do Companies List in the Stock Market?

Video Placeholder: "Understanding the IPO Process: A Step-by-Step Guide for Beginners"

The process of listing in the stock market is complex and involves several key steps:

1. Preparation:
• Financial Statements: Companies must prepare audited financial statements and a detailed business plan.
• Underwriters: Underwriters (usually investment banks) help companies identify how much money they must raise, what securities to issue, and how to go about the IPO process.
• Legal and Compliance: Ensuring all legal and regulatory requirements are met.[1] 
2. Regulatory Approval:
• In India, companies must get approval from the Securities and Exchange Board of India (SEBI).
• Submission of a Draft Red Herring Prospectus (DRHP), which includes detailed information about the company, its financials, and the IPO.
3. Marketing:
• Roadshows: Conducting presentations and meetings with potential investors to generate interest in the IPO.
• Marketing Campaigns: Using various marketing channels to attract a broad investor base.
4. Pricing:
• The company and underwriters determine the IPO price through a book-building process or fixed-price method.
5. Listing:
• Allocation and Listing: Shares are allocated to investors, and the company gets listed on the stock exchange.
• Trading: Trading shares begins, and the company officially becomes a public entity.

Advantages of Going Public

1. Access to Capital: Public companies can raise substantial amounts of money by selling shares to the public, which can be used for various business purposes.
2. Increased Visibility and Credibility: Being listed on a stock exchange enhances the company's reputation and profile, making it more attractive to customers, partners, and employees.
3. Liquidity: Shareholders, including founders and early investors, can sell their shares in the open market, providing liquidity for their investments and their exit.
4. Growth Opportunities: With increased capital, companies can invest in expansion, R&D, acquisitions, and other strategic initiatives to drive growth.

Disadvantages of Going Public

Let’s Understand This With an Example!

Let's take the example of Zomato. This well-known Indian food delivery company went public in 2021. Zomato's IPO was one of the most highly anticipated in India. The company decided to go public to raise funds for expansion, enhance its brand visibility, and provide liquidity for its investors.

Before the IPO, Zomato ensured its financial statements were audited and compliant with regulatory requirements. They selected underwriters to manage the IPO process and submitted their Draft Red Herring Prospectus (DRHP) to SEBI for approval.

Zomato conducted roadshows and marketing campaigns to attract investors, explaining its business model and future growth prospects. The IPO price was set through a book-building process, and eventually, shares were allocated to the public. Once listed, Zomato saw a significant increase in capital, which it utilized for expansion and innovation.