What is IPO? Most of us tend to look at an Initial Public Offering (IPO) as a means of raising money from the market. But there is a much larger role that these IPOs play. Apart from allowing the company to raise money in the markets and getting the shares listed, there is also a reputational aspect to it. There is a certain transparency assumption and also an assumption of corporate governance that is associated with a company that has done an IPO and got listed. At the end of the day, an IPO does make the company more trustworthy in the eyes of retail and institutional investors. Here is why the IPO has a major role in building trust for the company.
How an IPO Builds Trust in the Company?
The typical “Going public” figure has further emerged huge as one rags2riches story of all time, the literary archetype of a person’s extraordinary, & sometimes instant, rise to pure wealth. Innovative minds build a business from a raw idea, raise money to make it grow with a growth trajectory of a hockey stick and watch the stock soar as the management committee rings the opening bell at their IPO.
Related: 5 Key Steps to Prepare for an Initial Public Offering
It needs to be remembered that an IPO is not just a one-off act but an elaborate process culminating in a listing. Also, an IPO pre-supposes a greater commitment to the shareholders and the investors. Here are some key reasons why they build trust.
- An IPO is an affirmation of the fact that the company genuinely has a good story to tell its investors. Otherwise, companies do not take the IPO route. When a company comes out with an IPO, it has policy implications that go far beyond the company, its founders or its early investors. Both the company as an entity and the promoters of the company actually open themselves to greater scrutiny from the exchanges, from MCA and from the regulator SEBI. This is instrumental in building trust in the IPO Company.
- A private company going for an IPO essentially testifies that it is willing to meet the same standards of increased corporate governance, responsible leadership and financial transparency as listed companies. An IPO and a subsequent listing is a sign of self-regulation and it is in the best interest of investors, customers, and financial markets. Therefore, an IPO signals the growing up of the company as a responsible organization and also as an investment.
- Today entrepreneurs have a variety of options and that explains why many e-commerce startups have opted out of the IPO route. Companies like Ola, Paytm and Flipkart are cases in point. Most startups find raising money from VCs and PEs easier. When a company comes out with an IPO despite alternatives, it is a clear indication that the company is willing to stand the market test. That is crucial for investors; both retail and institutional investors.
- A company that is IPO-ready is not underestimating the IPO process in one significant way: It doesn’t just serve as a checklist to take a company public but further acts as an impetus to drive them way out of their comfort zones. It acts as a guide for companies to mature. An IPO inspires trust because it is only when a company comes out with an IPO and gets listed that it can create wealth for millions of shareholders. That is what companies like Infosys, Reliance, and Bharti have done. That is exactly what the likes of Flipkart and Paytm have failed to do.
- Investors find it easier to believe a company that is coming out with an IPO as such companies go through multiple levels of scrutiny by internal management, by investment bankers, by the regulators and finally by institutional investors and brokers. Without the transparency of public financials, mandated corporate governance protocols and an open market to value them, small investors are typically vulnerable to investing in the wrong company. The rigor of the IPO process makes it simpler and safer for investors.
The ‘Going public‘ factor means a company has met that higher standard of transparency and financial responsibility in the form of bylaws, independent directors, regular disclosure, and checks and balances on accounts. It is easier to rely on a company that is listed because it is required to reduce dependency on one or two promoters. This prepares the company for the next stage of the growth cycle.
Lastly (and important), an IPO is an opportunity to access a lower cost of capital, market a company brand and create currency for an acquisition. What a lower cost of capital means is higher ROI for the shareholders. An IPO conveys to consumers, investors, and employees that the company has the governance and discipline to seek a fair return on investments and that it’s ready to grow responsibly.
A word of caution here! Not all IPO companies are designed to outperform the market and we have seen enough such instances. But the bottom line is that IPOs do give an aura of accountability to a company. That is what matters!
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