Advantages and Disadvantages of IPO/Public limited Companies

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The following are the advantages of a public limited company

No cost of capital:  It does not need to pay interest on the capital raised from Public. Even it doesn’t need to repay the capital. Only in case of liquidation/bankruptcy it needs to pay the residual amount after paying bank loans, debentures, preferential shares etc.

Huge amounts can be raised: It can raise huge amount of capital by going to public which may not be possible otherwise.

Brand Value: Company’s brand value will get increased because people come to know about the company very well.

Correct Valuation: Since the share price reflects the company’s financial healthiness it would become easy to arrive at a price in case of mergers and acquisitions.

The following are the disadvantages of Public limited company

Disclosure of information: Once a company becomes public it has to disclose so much information to public on regular intervals. This includes share holding pattern, quarterly and annual financial statements, profiles of directors etc. Because of this restriction companies will always be under pressure to perform and show profits in every quarter. This, some times, doesn’t allow the management to take bold steps which may yield long term benefits but less profits in short term.

We have seen some companies in recent times going bankruptcy because the share prices fell down as the investors’ scrutiny increased a lot. Some of them would have come out of this situation if they weren’t public limited companies.

Decisions take time: Implementation of any key decision is subjected to the approval by the board of directors elected by share holders. This process may take more time.

Cost of IPO: The cost of the process is very high, though it’s one time expenditure. The investment banker/underwriter charges heavily for doing this activity.

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{ 1 comment… read it below or add one }

ankwasa scleven June 1, 2012 at 2:37 pm

Excellent information! Keep it up. Dedicated 2 Kabale University students.

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