Question

Public issue is the most popular method of raising capital these days by entrepreneurs, which involves raising of funds directly from the public through the issue of prospectus. Which of the following is an advantage of raising funds through public issue?

• A. It increases accountability to public shareholders.
• B. It can be used for businesses to grow through acquisitions.
• C. It increases costs in complying with higher level of reporting requirements.
• D. It needs to maintain dividend and profit growth trends.

Hint:

While going public introduces strict regulatory requirements and reduces operational control, it gives companies a liquid currency—publicly traded stock—that can be used to fund strategic acquisitions and drive rapid expansion.

Answer 1

The Correct Option is B

Step 1: Analyzing the Implications of Going Public:
An Initial Public Offering (IPO) or public issue transforms a private enterprise into a publicly traded corporation. This transition introduces several structural advantages and operational challenges.

Step 2: Evaluating the Disadvantages of Public Issues:

• Loss of Control & Accountability (A): The founders become accountable to a board of directors and a diverse group of public shareholders, reducing their operational autonomy.
• Compliance Costs (C): Public companies face strict regulatory oversight (such as SEBI guidelines) and must pay significant ongoing audit, legal, and reporting costs.
• Market Pressure (D): Public markets put pressure on companies to deliver consistent, short-term quarterly profits and dividend growth, which can distract from long-term planning.

Since options (A), (C), and (D) represent challenges or disadvantages of going public, they can be ruled out.

Step 3: Evaluating the Advantages of Public Issues:
An IPO provides a company with highly liquid capital and public stock. This stock can be used as currency to acquire competitors or complementary businesses, allowing the firm to scale rapidly through mergers and acquisitions without depleting its cash reserves. This makes (B) a major strategic advantage of going public.