Why Companies Choose to Launch an IPO: The Role of IPOs

Listing on a stock exchange is not the issue; there could be several strategic decisions involved with long-term effects. Initial Public Offerings are, therefore, an important step in the life cycle of a company. This blog explains the main reasons companies issue IPOs and how such steps take them toward their future goals.

Raising Capital

Among the major reasons for an IPO is the raising of capital. A company needs capital to expand, grow, pay off its debts, and invest in future projects. Going public provides bucketloads of capital to achieve all such financial goals.
For example, the IPO of Tata Technologies in 2023 aimed to raise Rs 3,042 crores. It's something like refueling a rocket for its next big launch into the market!

Exit for Early Investors

An IPO provides an exit route to early investors or promoters by letting them sell their shares to the general public. This happens mainly through an offer for sale, where existing investors can reduce their stake and seek other opportunities.
For instance, the OFS in the Nykaa IPO in 2021 freed the sale of some holdings of early investors and promoters. This gave them both liquidity and exit options, thus opening doors for new investors to board the platform of this thriving beauty and fashion e-commerce platform.

Business Expansion

Companies need enormous capital to extend their operations and finance new projects. This could raise a huge amount of money through IPO to support plans for business growth and expansion.
For instance, when DMart (Avenue Supermarts Limited) went public in 2017, it generated around ₹1,870 crores to open new stores across various locations in India, enhancing its presence in the retail market. This IPO acted as a stepping stone that fueled DMart's larger customer base and increased its market share.

Loan Repayment

The money raised through an IPO can be used for debt reduction and, thereby avoid interest and capital repayment-related problems. This would depict positively on the financial health of the company and its balance sheet.
For instance, a part of the funds that Reliance Power raised from its IPO in the year 2008 was used to repay its outstanding debts, thereby making the company's financial position stronger. It was a strategic move forward with a cleaner balance sheet.

Improved Credibility

Going public increases the profile of a company through media coverage and transparency in business operations, which enhances visibility and credibility to more investors and customers, thus improving the brand image of the company.

Conclusion

An IPO is much more of a strategic move than a financial event. It is associated with the objective, intent, and a firm devotion to excellence and innovation and signifies more than just a number.
The risks are always great for businesses that are planning on going public, but the rewards are also significant. And this is their opportunity to share what happened on a massive scale, inviting everyone to accompany them on this adventure and find their potential. Although a journey could be challenging, the reward could be extraordinary: a successful company that is strong and ready to explore new markets.

Also Read:

IPO | Glossary | Advantages of IPO | Shareholder Quota in IPO