Equity carve out can be defined as a process by which a company converts its division into a wholly owned subsidiary by offering its shares to the public through IPO. Once equity out is done the shares of the subsidiary will be listed and traded on the stock exchanges. Equity carve out results in inflow of cash into the company as shares of subsidiary are sold to public and therefore those companies who require cash can go for equity carve out.
The subsidiary will be a different company from the parent company, however parent company may hold majority stake in the shares of the subsidiary. Equity carve out can be done only for those divisions which have strong growth potential, because if there is no growth potential than investors would rather buy shares of parent company then buying shares of its subsidiary.
Equity carve out can lead to problems, when the interests of the shareholders of parent company conflict with interest of the company which is carved out and therefore this thing should be kept in mind before a company decides to go for a equity carve out.