Why Do Companies Go Public for IPO? IPO Eligibility Criteria

Are you a newbie in the stock market or you may have a doubt about why do companies go public and why do they enter in the stock market? Just read this blog and you will get all your answers here. 

Before knowing why do companies go public, you should know about IPO, what it is, IPO what it means in simple words. 

What is an IPO (Initial Public Offering)?

IPO (Initial Public Offering) is a situation where the company is already stable and in profit, entering the public from private for more money to grow the company. 

When a business starts, it gets capital funds from promoters, including the entrepreneur’s savings.  When they get good profits in the starting stage, they get funds to increase business more from Angel Investors; later, they get investments from big companies/financial institutions, also called Venture Capitalist firms. 

Here comes the main stage, the IPO, where the company goes into public and gets funds from the public in the form of equity securities or debt securities by getting an IPO from the Securities and Exchange Board of India (SEBI). There are two stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

When a company gets a green signal from the Stock Exchange Board for IPO, that company name is displayed on the Stock Brokerage platform’s websites/apps. From there, a person with a Demat Account can buy particular company stocks; this is how the process is done, from IPO to selling of company shares in the form of equity.  

You may doubt why do companies go public when they are already getting profits at their current stage. The thing is, every company owner wants his company to be on the top of the list; when the company goes public, it gets more money, and with that, a company can create new products or they can improve its product with research and development team, the reason may be anything, with an IPO a company can achieve anything.

Reasons Why do Companies go Public for IPO

There are many reasons to choose an IPO, it gives a freedom of thinking ideas and implementing it in business for long-term profits.

Getting Unlimited Capital

When a company goes public it gets a huge amount of money from the public, whenever anyone buys the stocks of that particular company that money will go to primary market holders. Those primary market holders are the ones who have “Lots” of that particular company which they purchased during IPO bidding. With that capital a company can do whatever they planned to do for business growth. 

A Positive Public Image

After listing on SEBI a Company gets a good image, customers believe in a product which that company is making and selling because it is a publicly listed company, it will get recognition due to the IPO and mouth marketing.

Benefit of Liquidity

With the help of Offer for Sale (OFS) , a company ‘s existing shareholders, owners and investors can sell their shares in an open market and liquidate their holding through IPO listing.

Merging and Acquiring of Companies

When a company goes IPO, its credibility increases and it has a huge capital for more R&D and new investments. With an IPO a company can merge with another company or can buy a profitable small company and acquire it. Example: Zomato after getting IPO in 2021 acquired Blinkit in the year 2022. 

There are still many reasons which are very beneficial for a company listing for an IPO and coming public, you can find more other reasons on the internet or you can know it from a finance expert.

So the above reasons are pushing companies to come public and this helps the companies to raise funds from stock market, also there are criteria which are created by SEBI to approve a company for the IPO listing.

Eligibility Criteria for IPO (Initial Public Offering)

There are criteria for getting listed in an IPO; not every company gets a green signal for an IPO from a Stock Exchange board, and the company should follow some regulations to go public for Investments.

• The company that is filing for an IPO must meet certain criteria.
• The company should have had three crores in net tangible assets in previous years and a minimum net worth, net tangible assets, and pre-tax operating profit of at least 15 crores in the past 3 years.
• It also ensures that the company IPO issue size should not exceed five times its net worth.
• If the company changes its name and runs under a new name, 50% of the total revenue from the previous year must come from a newly named company.
• The company must have a paid-up capital of Rs. 10 crores. (Paid-up capital is an amount of money that is received from shareholders in exchange for shares of stocks.
• There is a period for IPO applications from 10 AM to 5 PM, and it is closed on government holidays and weekends.
• A company can hold its IPO subscription for a minimum of three days to a maximum of 10 days.

A Friendly Advice: In India, there is no proper education on finance related to IPO and the stock market. Anyone can learn stock market-related information online from a finance blog and finance YouTube channels. It is recommended not to take any advice from fake influencers and stranger random finance advisor who tell you to invest in a particular company stock for a short-term profit. Always be educated and be strong. 

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