Public equity financing: Why corporations do IPO?

Written by Student Reporter (Carino Javier, Management 2021)

Many businesses expand and thrive through Initial Public Offering (IPO). It becomes popular as an effective way to gather funds for their businesses. Yet, why do corporations undergo IPO and finance their expansion by using public equity?

The President Director of Tekindo Group, Antonius Setyadi offered insights on the question during his virtual guest lecturing on Friday (11/09/2020). He explained that IPOs were corporate actions where a company released its shares to the public. Thus, he added, the public had the opportunity to acquire and become a shareholder of the company.

“When you’re a CEO of a public company, your responsibilities are intensified. You must strive and find ways to provide value to the shareholders. Furthermore, you must ensure performance growth to maintain and sustain the company too,” said Antonius.

“So, why do companies go public?” asked one of the students. In short, he said, the common reasons went to the expansion and growth opportunities whereas companies faced the limited financial capacity or limited access to financial resources. “First reason, not many companies have enough internal capital to expand, and they don’t want to have debt issue. The second reason is, the companies have exhausted their external financing sources or options,” told the MBA graduate.

He also highlighted that shareholders might also be hesitant either to provide additional capital or further released companies’ assets. “Because the cost to issue additional capital is expensive. And most existing assets have been used as collateral therefore they don’t have any more assets to use,” told the CEO.

IPO’s pros and cons

Before ending the lecture, Antonius Setyadi explained the pros and cons of going public. He started with the disadvantages of going public. According to him, “The significant disadvantages revolved around the increased information disclosure and fees. Going public requires the full disclosure of corporate information. Thus, important and sensitive information and data are released to the public.”

He then talked about the cost of undergoing an IPO in which was very expensive. “There are dozens of expenses that you have to pay for an IPO. You have to pay for appraisers, legal counselors, notary, underwriters, and many other things,” he said while mentioning that in small capitalized companies, the cost was often not worth it.

In some cases, as he came further, the benefits of IPO often outweigh the disadvantages starting from increased valuation, prestige, company motivation, and other benefits. “The most significant benefit comes from financing and taxation. Public companies that listed 40% of their share qualifies for a 5% tax rate deduction. With a 25% standard tax rate, the public company will have a 20% effective tax rate,” as the Chairman of Castrol Indonesia explained.

According to him, the tax on proceeds from the transaction of shares would be deducted. For private companies, he said that each transaction was subject to a 0.5% tax while public companies enjoyed a 0.1% tax rate. “When you have shares worth 25 billion in a private company, and its value goes up to 100 million. You will have to pay 0.5% of your capital gain if you decide to sell your shares. Meanwhile if that company is publicly traded, you only have to pay 0.1% of that profit as tax,” Antonius Setyadi closed his session.