It is necessary to comprehend the factors that lead to an Initial Public Offering (IPO), as the IPO market, also known as the Primary Market, often draws many novice share market investors. This chapter will examine the IPO process, and the various elements involved in a company’s IPO.Why Do Companies Go Public?We ended the prior chapter with a few questions left unanswered: why precisely did the company take the step of registering an IPO, and in a broader sense, why do businesses opt to go public?When a business plans an initial public offering, raising funds to meet CAPEX needs is one of the primary motivations. Another aim could be to lower expensive debt or give an early-stage investor a means of exiting. If you wish to gain more knowledge on why a company has recently gone public, you can research by searching the internet for the company’s IPO reasoning.The promoters have 3 advantages if the company goes public:
Raising funds to cover Capital Expenditure (CAPEX) requirements is essential.
Minimising debt obligation eliminates finance charges, which translates to increased profitability.
By pooling resources from a multitude of investors, the promoter can minimize the risk associated with the investment. This approach offers more advantages than relying on a single large private equity backer. Hundreds or even thousands of retail investors can invest in the same project, enabling different levels of financial commitment and significantly reducing risk.
In addition to the potential advantages of an IPO, there are other benefits that come with filing:
Provide an exit for early investor
Early investors can provide themselves with an exit when the company goes public; this allows them to sell their shares – whether they’re from promoters, angel investors, venture capitalists, or PE Funds – in the open market to get a return on their investment. There may be a lock-in period before investors can exit.
The company’s employees can benefit from an ‘Employee Stock Option’ or ESOPS. With these arrangements, employees are allotted shares at a reduced rate. If the business then goes public, that can lead to capital gain for its staff. For instance, those working for Google, Infosys, Twitter, Facebook and Amazon have all gained from such schemes in the past.
Going public boosts visibility, generating more attention for the firm and contributing to its development.
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