When is the right time for a company to allow public investors

An IPO or an Initial Public Offering, also known as a stock market launch is the very first sale of stock issued by a company to the public. It is the process in which a privately owned and managed company issues shares to the institutional and retail investors for the very first time.

Advantages of a Private Company over a Public Limited Company

  • Private companies require a minimum paid up capital of only Rs. 100,000/- whereas a public limited company needs aminimum paid up capital of Rs. 500,000/-.
  • Private companies require a minimum of 2 Directors whereas Public Limited companies have a requirement of a minimum of 7 Directors.
  • A Private company can issue shares to anyone, any time and in the manner, it deems best for business. Whereas Public Limited companies have various restrictions and need to follow a well-defined set of rules and regulations while issuing shares which includes adhering multiple provisions related to form of share capital issued, the proportion of voting rights to paid-up capital and restrictions on excessive voting rights.
  • A private company can commence operations upon issuance of the certificate of incorporation whereas a public limited company can only start the business upon receipt of commencement of business certificate.
  • Private companies are not required to statutory meetings as in the case of public limited companies.

Why do Private companies go Public?

As businesses expand, they constantly need to raise capital to purchase of assets and infrastructure, invest in research and redevelopment projects to develop new innovative products and services, paying off debts. Private companies are owned and managed by individuals, families or a group of individuals who have limited ability to raise finance.

We have listed a few advantages for companies to remain privately held, but when the advantages of going public outweigh benefits of remaining private, many companies opt to go public by issuing an IPO, to raise capital for expansion, product development, investment in infrastructure etc and raise debt at better rates.

Public companies can also raise additional capital by issuing fresh shares or NPOs, reward it employees with stock-based incentives or stock-options, conduct mergers and acquisitions etc.

How to know that your company is ready to go public?

  1. You have a Compelling Business Plan to go Public : 

    A company needs to have a robust business plan to go public and should have undertaken an in-depth market and risk analysis before deciding on going public. A business should be aware of its growth potential, the size of its market, competitive advantage within a market etc. As issuing of an IPO can be seen as a significant milestone for any business and becoming a public limited company can be witnessed as a strong indication towards a businesses growth potential and the business shall be able to comply with stringent standards for compliance and governance while continuing on its road to growth.

  2. The Business can accurately forecast its Financial Performance :- 

    Accuracy in financial performance forecast including revenue and cost projections as an essential component of for a successful business. The need for accuracy in financial performance becomes more critical for a public limited company as with institutional investors, and any missed projections can have an adverse impact on its share price and market valuations. Developing accurate budgeting and forecasting functions are vital for companies who wish to go public in the future. This further is helpful to gain credibility with investors the company needs to share its historical financial statements and forecast during the IPO process.

  3. Business has the Right Executive Team in Place:-  

    It is highly essential for a business to have the right team of executives who can lead the company in the future. Converting the company from private limited to public limited invites a lot of restrictions, compliances and expectations from the investors. Hence before planning to issue an IPO, the business needs to have an executive team and structure in place with well-defined roles, responsibilities, accountability and a line of reporting. Also, a business needs to consider the development of departments and teams which were earlier not required the privately held firm. These include mainly the investor relations and public relation departments which are essential for publicly traded companies to maintain investor confidence, ensure effective communication with the market, keep a healthy corporate and brand image and have a response team ready for unforeseen events such as controversies and other public relation disasters.

  4. Can the business close its books in time and be audit ready? 

    Public Limited Companies are required to periodically declare their quarterly results and annual results within a stipulated amount of time. Most private limited companies have the practice of filing their financial returns at the very last minute, which is not advisable for a public limited company. Also, public limited companies are required too much stringent financial audits as compared to private limited companies. Hence it is essential for private companies who have plans to go public and issue an IPO in the near future to declare quarterly results in time (even though they are not legally required to) and make it a practice of reporting financial results timely and drop the common Indian practice of waiting till the last minute.

  5. Does the Business have a Realistic Valuation Expectation ?

    The valuation of shares issued at an IPO is a delicate art of setting a price to release maximum capital for the company without discouraging the investors with exceeding high valuations. A company wanting to go public needs to have a realistic valuation expectation as multiple factors can affect a share’s valuation. These include the price/earnings of your publicly traded peers, evaluation of your underwriters and financial sponsors, the market conditions etc. are deemed to influence the valuation of your share at time of IPO while the financial performance of the company post an IPO can help with the valuation of your company’s shares in the long term.

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