Reasons for Issuing an IPO

 

Reasons for Issuing an IPO

An IPO (Initial Public Offering) refers to a process where a private limited company offers the shares to general public to raise their capital from the public investors.
Now, it is very important for the company to realize profits from their investment as it typically includes some share premiums for the current private investors. It allows public investors to participate in the offerings.
After knowing the meaning of an IPO, the question arises is what are the reasons for offering IPO.

Let’s discuss about the reasons for offering IPO to general investors.
1. To Raise Capital for Business- The IPO is issued specially when the companies require capital for their new businesses or expanding the existing business. The primary source of funds is the loans from banks. Since the funds are raised from the public, there is no commitment for any fixed interest pay-out to the shareholders of the company. The profits earned are shared among the shareholders in their decided proportion. There are two ways in which the companies share the profit among the shareholders i.e. Dividend Pay-out and capital appreciation. Thus, the foremost reason to issue an IPO is to raise the equity capital.
2. To create liquidity for the Employees- The second reason to issue an IPO is to create liquidity for the existing investors such as company’s employees. Some of the unlisted firms offer Employee Stock Option Plans (ESOP) to its employees. Under this scheme, the RSU are provided to the employees for the long-term association with the company in future. This arises an uncertainty regarding it among the unlisted company employees and thus the need of issuing an IPO arises. By IPO, the company provides various exit opportunity for the employees to liquidate their ESOPs and the listing for the same is done via IPO route. This becomes easy to sell the listed shares and then have the liquidity for the employees of listed firm.
3. Branding and Visibility- The company issues IPO to offer the branding and visibility for the products and services of the company. Recently, Mr. Mukesh Ambani has said that they come up with more than 2 big IPOs by the year 2024. For example : Reliance Retail and Reliance Jio.
4. Currency for Merger and Acquisition- It is one of the important reasons to issue IPO. IPO issued to generate currency for mergers and acquisition. For example: In Gruh Finance and Bandhan bank merger 1000 shares of Gruh Finance were converted into the 568 shares of the Bandhan Bank. There is no specific exchange of capital for such mergers. In this example, Bandhan Bank has become the shareholder of Gruh Finance after the share swap execution.

Conclusion
The public share issuance allows a private company to raise the capital from the public investors. The basic primary aim of issuing an IPO is to raise the capital for the business. IPO comes along with some other advantages. The company provides access to various investment from the entire investing public to raise the capital. IPO facilitates to easier share conversion deals.


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