Why Go Public?

Taking a company public is the major financial reward. It brings glamour and prestige, and is one of the acknowledgments of success in business, but taking a company public is a complex process. It involves many different business disciplines and can be mysterious and confusing, even for those who have been through it several times. It's not surprising that entrepreneurs and their management teams are intimidated. Consequently, they seek helpful information from IPO consultants.

Making an Initial Public Offering (IPO) has many advantages for a company.

1. A source of long-term capital: Offering their stocks to the public, companies use a low-cost and long-term source relative to alternative financing methods. Through the IPO, a company may raise funds to finance its expansion plans, enhance its competitiveness or establish an improved financial structure. Apart from issuing and listing equity shares, a public company can raise additional capital by issuing and listing other types of securities, such as preferential shares, warrants, debentures and convertible debentures.

2. Liquidity and increased share price: Companies listed on a stock exchange are typically worth more than similar companies that are privately held. The information contained in an IPO prospectus and subsequent annual reports reduces the uncertainty around performance and hence increases the value of a business. In addition, investors are willing to pay a premium for liquidity. Private companies have limited or no liquidity in most cases.

3. Catalyst for attracting foreign partnerships: In a globalized economy, having a strong, complementary, strategic business ally adds to a company's competitiveness. A 'Public company' status attracts foreign investment and opens up opportunities for business expansion and modernization.

4. Management accountability and professionalism: Investor confidence, reflected to some extent in the level of stock prices, is a function of a company's standard of operations. The management of a public company must be accountable to its shareholders, who, in turn, play a role in ensuring that the company operates in an efficient manner. Shareholders benefit from improvements in a company's operational efficiency.

5. Management and employee motivation: Equity-based awards and ownership tend to be spread more broadly among management and employees in public companies compared to private companies. In addition, management and employees of public companies can see the results of their efforts in the share price more immediately.

6. Positive public image: Because Securities Exchange Board of India (SEBI) monitors listed companies, such companies share a positive public image. Generally, listed companies are thought of as financially healthy and having high standards of transparency and information disclosure. This public profile boosts a company's credibility, increases its bargaining power and reflects positively on its products and services. Many analysts believe there is considerable prestige attached to managing and working for a publicly listed company.

7. Access to alternative sources of capital: Another benefit as a result of a company going public is the ability to gain access to alternative sources of capital in the future. Public companies are often able to raise money for expansion more easily and at better rates than private companies of similar size. The public debt markets are more accessible to public companies than to companies without a listing. Moreover, going public generally improves a company's debt-equity ratio and may enable it to borrow on better terms in the future.

8. Ancillary benefits:

a. The flotation process often forces a company's management to formulate and document a clear business strategy for the first time.

b. This is typically beneficial to the future success of the business and in many cases is just what a private company required to truly grow from small to medium or from medium to large in size.

c. The anticipation of public ownership leads many companies into improving their management and financial structure. Fast growing medium-sized companies often neglect the formal structures which will help them in their attempts to become larger and more profitable companies.

9. Shareholders' benefits:
a. Increased liquidity: Listing on a Stock Exchange generally increases the liquidity of a company's securities. Shareholders find potential buyers more easily, as their stocks are more marketable. The market value of a listed company is easier to determine and its shares are acceptable as collateral for loans.

b. Shareholder protection: To ensure that the benefits to investors are protected, SEBI issues rules and regulations governing securities trading and information disclosure. These rules and regulations ensure the transparency, adequacy and promptness of information disclosure and guarantee investors equal access to this information.

c. Tax Advantages: Shareholders of listed companies have the following tax privileges:
i. Long-Term capital Gains from the sale of listed shares are presently tax-exempted.
ii. Short-Term capital Gains from the sale of listed shares are taxed at lower rates.
iii. Dividend Income is presently Tax-Exempt.

Deciding whether to "go public" is one of the most important decisions a successful private company can make. "Going public" presents many attractive opportunities to a growing company and its founders. At the same time, the process can involve many issues which must be carefully considered. Making the right decision requires a thoughtful balancing of the relative benefits and burdens in each situation.
There are costs involved that include both the direct costs, in time and money, of the flotation process as well as the opportunity costs of under-pricing the offering and subsequently the costs of increased disclosure to public shareholders.

Draw-backs of Going Public:

1. Increased disclosure: Companies are required by stock exchanges and regulators to disclose information on a regular basis so that investors and potential investors can make buy, sell or hold decisions. A much greater amount of information is required at the time of the IPO and is included in the offer document.

2. Costs of IPOs: Initial public offerings involve many costs like Investment bankers' commissions, lawyers and accountants fees, ancillary costs, such as public relations, printing, corporate advertising and others. In addition to the upfront costs, there are the costs of maintaining a quote on the stock exchange (stock exchange fees, management time, more extensive audits and reporting, etc.).

3. Dilution of control: Not all IPOs are for more than 50 per cent of the issuer's voting shares, in fact, the average is around 30 per cent. So although control is not lost through the IPO, if the company requires further equity to fuel its growth, existing shareholders will suffer dilution.

4. Perceptions of short-term growth: In order to meet investors' quarterly or semi-annual earnings expectations, a company may be forced off the long-term strategy that was in place prior to the IPO. Managers may feel compelled to follow strategies that support the share price in the short term, rather than over a long time horizon.