By Vishweshwar HS, www.showmytrade.com
Entrepreneurs build the business around solving big problems. Workaround clock along with their team to achieve the best solution possible to the whole market. They need significant capital for creating a long-lasting company. Initially, they start and grow their venture with their own money, friends, family, Banks, and investors. The profit enjoyed, and they also bear the loss. As customer traction and profitability increase, they want to scale their business to greater heights. The capital sources initially invested in the company are not sufficient; they need to raise more capital. Traditionally, the bank can advance any loan, but they need collateral. Entrepreneurs may not get an adequate valuation for getting more capital. They need continuous funds for their growing company in the longer term.
At the expansion stage, companies have the option of inviting the public to contribute to the capital. So companies invite the general public, high net worth individuals, big institutions, etc., to issue and subscribe of equity shares. The way to encourage share capital from the public is through a ‘Public Issue’ or an offer to the public. Subscribe to such Public Issues for the share capital, source of funds to the company. After following all the rules and regulations of regulators like SEBI, Exchange, or any other government agency, the company allots shares to the applicants.
A public limited company invites the public at large through prospectus to subscribe to the issue of securities. First time if the company offers the shares to the public is called Initial Public Offer or IPO.
One source of raising a huge capital is from the primary market and subsequently listed in the stock exchange.
Usually, the company needs to raise substantial capital for going public. The proceeds can use to set up massive manufacturing units research and development centers, human resources needs, talented marketing deportment, and infrastructure needs. Thus, achieving the scale of economy and differentiated market segment for sustainable and profitable growth. The public ltd co has more options for raising the capital debt both from Indian and foreign markets.
The stakeholders – Promoters, management, private equity/venture capitalist, and employees take a considerable risk for the success of the company. They put in a lot of work. They expect handsome returns for their efforts. Private equity/venture capitalist has the first right to sell their shares in Initial Public Offer (IPO). Subsequently, promoters and employees can sell their shares at a higher valuation for substantial returns for their effort. Going public brings both a higher valuation and liquidity for the stakeholders.
Companies can grow a huge multi-national companies. The company can grow both organically and inorganic ways. The company can buy other competitors or other small niche companies for its innovative product or solutions. A public listed company can buyout such companies for partial cash or exchange their company shares instead of cash!
The Public Ltd Company has professional management; qualified employees, system, and procedure ensure that planning and execution at an expected level. Public Ltd Co is highly visible with its brands. Also highly transparent and accountable as regulators watching it!
Some of the public ltd companies existed for 100 years. The products, shape, and size of the companies changed considerably.
Public Ltd Co. is the growth engine of the modern economy to provide significant employment directly and indirectly. The government earns Hugh Taxes and other levies. As ownership is freely transferable, public companies usually perpetually exist.
When the promoter dilutes shares, the other significant shareholders elect the board of directors. The majority of the decisions which are affecting financial position need to be approved by the majority of shareholders. Even small shareholders may raise objections in the general body meeting. There could be colluding ideas about long-term and short-term objectives between the promoter and small shareholders. In a public limited company, it will be cumbersome for the company’s promoters to make the decisions.
The company should make available every three months once the balance sheet. The company books should audit filed with regulatory agencies and distributed to all shareholders (even one shareholder of the company). The procedure and regulatory compliance is an enormous cost for the company.
The upfront cost of raising capital is enormous. The compliance cost, advertisement cost, under-writer commission, account and legal fees, printing charges, registration cost, etc. Management and accounting system must upgrade as defined by regulators. More importantly, the board of directors should be highly qualified. All these costs are huge to raise the capital from the market.
Going public has several advantages and also disadvantages. The promoter group should consider all possibilities. Market conditions very well to very worse. Raising capital is very challenging at times. There are several examples of failed public limited companies in India. If the quality of the management is good, public limited companies will create unbelievable wealth and success for their shareholders in the long term.
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