Whereas the shares of any Private Limited Company is not traded on the market, converting to a Public
Limitedstatus after an Initial Public Offering (IPO) allows for its shares to be now traded on the
bourses. This conversion is known as “going public”. And once the process is complete the “public”
version becomes a publicly-traded and owned entity.
In the India of recent times, the shares offered to prospective buyers are at multiples of their
“face” value. Dividends, on the other hand are based on face value. Thus the actual cost of capital
for the capital collected from buyers is a fraction of what it would be through borrowing. Many
private players find this mouthwatering.
They feel it kills two birds with one stone, for, the extra capital raised not only allows them funding for
accelerated growth but comes at a much lower price.
And Venture Capitalists who may have invested in the company when it was private also find it mouthwatering. It
allows them to exit with a sure and substantial profit.
Other Benefits that accompany this are increased prestige and ability to make more acquisitions.
However, the downside is: Going public diversifies ownership, imposes restrictions on management, and to greater
regulation.It may increase costs and forces disclosures to the public. It certainly makes the former business
owners lose control of how they ran the company.
Looking at the events of 2018 (period unaffected by COVID), the Economic Times reported: some 69 companies raised Rs.27,900crores through IPOs. 47 of them dropped significantly in share value eroding Rs.4,700crores of wealth. This does not fully represent the real picture because large top performers such as Bandhan Bank and HDFC Mutual Fund made up for a lot of it.
The Value of the company! First, the track record of your company; next,the business plan that you present must have conviction for investors. Then the quality of leadership which is one of the biggest factors investors examine, even beyond the financials. There was a time when people bought shares purely on the advice of pundits – but times are changing. You and your management team must be self-aware enough to assess this realistically. If you do not have stable footing or know what direction you want to go, the public markets are likely to get to know in which case you will not get a good price. Even if you manage to overcome this, the prices of shares for the publicly listed entity will begin to drop; eroding value for you. However, an IPO does give you the opportunity to exit the company, if that was a part of your plans. If so, the fall in prices could be quite dramatic and affect you before you have fully exited.
After the IPO, the company may be left with surplus funds. Although these may be parked in bonds or banks, this fetches low returns. If as a private player you were highly profitable, giving great dividends to shareholders, such surplus will drag your profitability downimpacting your personal earnings. So you need to be clear about Plan A and the amount you need to begin with. You should also have prepared a Plan B if “A” does not work out. Study scenarios and ask yourself: is the loss of control (and possible loss of earnings) worth it?
Cost of capital has been steadily declining in India. Unless banks have stopped lending analysis can indicate alternatives. These may be slightly costlier or bit slower, but control will remain with you. Seek the help of dedicated professionals.