Going public is a huge milestone for a company, but what happens when a private company goes public.
From stock options to market valuation, let’s explore the key transformations of an IPO!
Private Company Going Public, What Does it Mean?
A company going public means when a private company offers its shares to the general public through an Initial Public Offering (IPO) for the first time.
The shares of the public company can be traded on a stock exchange like the NSE or BSE. This marks the transition from private to public ownership.
14 Key Changes to Expect When in A Private Company Goes Public in India
Let’s take a look at some of the changes that you can witness once the company goes public:
1.
Corporate Governance
Once a company goes public, it must adopt stricter corporate governance norms to maintain transparency with shareholders.
These norms are dictated as per SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations.
Independent directors are required on the Board of Directors to ensure unbiased decision-making.
The company must form committees such as Audit Committee, Nomination & Remuneration Committee, and Stakeholders Relationship Committee.
2.
Ownership , Existing Shares & Shareholder Stakes
When a company goes public, the ownership of the company becomes shared among the public.
The company issues new shares to raise capital, and these shares are listed on a stock exchange.
Private shares are either converted into public shares or offered for sale during the IPO. Existing shareholders may retain their stake or sell shares on the stock exchange after listing.
Therefore, the existing promoters and shareholders of the private company will experience dilution of control.
Depending on the revised share distribution, decision-making may shift from founders to shareholders and institutional investors.
3.
Governance & Management
Going public means greater accountability as decisions must align with shareholder interests.
The composition of the board may change as a result of this transition.
The public company may have to appoint independent directors to meet the regulatory requirements.
The board’s role becomes more focused on ensuring compliance with public market standards.
This may lead to an increased involvement of professional managers rather than just founders or family members.
4.
Operational Changes
Going public also means ensuring more transparency and structured operations to meet public market expectations.
A stronger internal control system is required to manage compliance and reporting.
The focus of the company shifts from long-term vision to quarterly financial performance and shareholder value.
5.
Legal & Taxation Changes
The company may become subject to changes in tax laws such as being eligible for certain tax incentives, additional compliance costs or higher taxes on dividends.
Apart from this, with public visibility, the risk of getting into legal disputes also rises. This can mean shareholder lawsuits, regulatory investigations, or commercial litigation.
If the company has a global presence, it must comply with the tax and regulatory requirements of other countries as well.
6.
Risk Management & Internal Controls
The company will need to implement more robust internal control systems to comply with regulatory standards.
Implementation of internal audits and enhanced fraud detection mechanisms.
Regulatory checks and external audits become mandatory.
7.
Market Risks & Volatility
Public companies are more vulnerable to external market forces, such as interest rate fluctuations, economic downturns, and changes in government policies.
As a public company, the stock price may fluctuate based on market conditions, investor sentiment, and macroeconomic factors.
This can increase the financial volatility of the company.
Public companies are required to have an independent audit committee that oversees the internal audit and compliance processes, ensuring the company meets regulatory standards.
8.
Access to Capital
The company can now raise capital by issuing new shares, offering stock options, or through other equity-based instruments.
It can now also access debt markets more easily.
9.
Liquidity for Shareholders
The existing shareholders (promoters, venture capitalists, etc.) now have an opportunity to exit partially or fully.
They do this by selling their shares on the stock exchange, in a secondary offering, or via other means.
This increases the company’s liquidity and can help it raise additional funds in the future.
10.
Reporting & Disclosure Requirements
The company must publish quarterly and annual financial reports to stock exchanges (NSE/BSE).
Any major decisions (mergers, acquisitions, leadership changes) must be disclosed.
Aprt from this compliance with Indian Accounting Standards (Ind AS) also becomes mandatory.
11.
Valuation & Market Perception
Market forces determine the company’s valuation. This can fluctuate based on performance.
Shareholder sentiment and market trends influence stock price.
Also, strong financial results and good governance boost market confidence.
12.
Increased Scrutiny and Compliance
When a company goes public if faces greater public and media attention on its operations.
Regulators like SEBI, stock exchanges, and statutory auditors closely monitor compliance.
In case any non-compliance is found, it can result in penalties, stock delisting, or legal actions.
13.
Employee Aspects & ESOPs
After going public, employees can benefit from Employee Stock Option Plans (ESOPs).
Public companies often implement or expand their Employee Stock Option Plans (ESOPs), allowing employees to buy shares in the company at discounted rates.
For senior executives, compensation packages may change as it is common for them to be linked to the company performance on the stock market, including stock-based incentives.
14.
Public Perception & Branding
Lastly, the company gains greater visibility, which can enhance its reputation and brand image.
However, this visibility can also attract risk of reputation damage if it fails to meet investor or market expectations.
Frequently Asked Questions
1. What happens to employees when a company goes public?
After going public, employees may benefit from stock options (ESOPs) and increased job security. However, they may also face higher performance expectations and corporate transparency.
2. What happens to private shares when a company goes public?
Private shares are converted into public shares. This allows shareholders to sell them on the stock exchange or retain their stake at market value.
3. What happens to private equity when a company goes public?
Private equity investors can exit by selling their shares in the IPO or hold them for potential value appreciation in the public market.
4. What happens to private investors when a company goes public?
Private investors may sell their shares during the IPO for a profit or continue holding them as publicly traded shares with increased liquidity.
5. What happens to stock options when a company goes public?
Employee stock options (ESOPs) may gain value and become tradable. This offers employees the opportunity to sell or exercise them based on market conditions.
