IPO & FPO Information
Initial Public Offering (IPO)
IPO is the process through which private companies sell shares to the public, allowing them to raise equity capital from investors. This transition turns a privately-held company into a public entity and opens the door for savvy investors to potentially enjoy substantial returns.
For those who are well-informed, investing in IPOs can be a strategic decision. However, it's crucial to recognize that not every newly launched IPO presents a stellar opportunity. The landscape of investing is filled with both rewards and risks. Before jumping on the IPO bandwagon, taking the time to grasp the fundamentals is essential.
IPO, or Initial Public Offering, is the process through which a private company transitions to a public one by offering a portion of its shares for sale to investors.
The primary motivation behind an IPO is to raise new equity capital for the business, enabling easier trading of existing assets, securing funds for future endeavors, or allowing current stakeholders to cash in on their investments.
Details about the initial sale of shares are available to institutional investors, high net worth individuals (HNIs), and the general public through a document called a prospectus. This document provides comprehensive information about the offerings.
After the IPO is completed, the company’s shares are listed and can be freely traded on the open market. It's important to note that the stock exchange requires a minimum free float for the shares, both in absolute numbers and as a percentage of the total share capital.
There are two common types of IPO. They are-
Fixed Price Issue
The company and underwriters evaluate its liabilities, assets, and various financial metrics. Based on this assessment, they determine the pricing for each issue in order to meet the desired capital goals. The order document will provide supporting evidence for the price, incorporating both quantitative and qualitative factors. The true demand for the securities will only be revealed once the issue is finalized, and it’s not uncommon for fixed-price offerings to experience significant oversubscription.
Book Building Issue
During the IPO process, price discovery happens within a range rather than a set price. This range includes a floor price at the bottom and a cap price at the top. Investors have the opportunity to submit bids for the number of shares they want at their preferred price. Based on these bids, the final share price is determined and securities are issued at or above the floor price. Each day during the book building phase, we can gauge demand.
Unlike fixed price methods that often lead to undervalued shares—typically pricing below the market value—the book building approach promotes efficiency by aligning supply and demand for shares prior to setting the price. This helps the company achieve a more equitable return while giving investors a chance for greater gains since the final pricing occurs post-IPO closure.
IPO Advantages and Disadvantages
Investing in IPOs has its ups and downs. Here are some key benefits and potential pitfalls you should be aware of before diving into your investment choice
Benefits of Investing in an IPO
Investing in an initial public offering withholds the below-mentioned advantages-
When considering the pros and cons of an IPO, one major advantage stands out. It enhances management's reputation and credibility, positioning the company as a trustworthy entity. Publicly traded companies tend to be more recognized than their private counterparts, and a successful IPO can also draw significant media attention within the financial sector.
A corporation can only access capital through the funds it raises when going public. The influx of cash can significantly impact the company's growth trajectory, potentially ushering in a new era of financial stability for an ambitious firm post-IPO. This strategic move can bolster research and development, support hiring new talent, establish new facilities, reduce debt, finance necessary capital expenditures, and acquire cutting-edge technologies, among other benefits.
- Diversification Opportunity
When a corporation goes public, its shares begin trading on an exchange, allowing a wider range of investors to buy in. This leads to greater diversity among shareholders, as no one investor holds a large portion of the company's stock. Consequently, investing in a publicly traded company can effectively enhance the variety within investment portfolios.
Going public pushes managers to focus more on profitability rather than other goals like growth or expansion. It also facilitates communication with shareholders, as they cannot conceal their challenges.
When a company decides to go public, it opens itself up to a fresh viewpoint on its business model, marketing tactics, and other elements that might stand in the way of achieving profitability.
Disadvantages of Investing in IPO
There are a few factors an investor would have to consider before starting to invest in an IPO-
IPOs can incur significant expenses. In addition to the ongoing costs associated with regulatory compliance for public companies, the IPO process requires firms to allocate funds for an underwriter, an investment bank, and advertising efforts to guarantee a smooth operation.
Public companies are guided by a board of directors, which has a direct reporting line to shareholders rather than to the CEO or president. Even if the board allows a management team to handle the daily operations, it still holds the ultimate decision-making power and can dismiss CEOs, including those who initially founded the company. Some businesses navigate this landscape by going public in a manner that provides their founders with veto authority.
In times of market uncertainty, companies that are publicly traded face significant pressure to maintain their stock prices. Executives might hesitate to take bold risks if it means jeopardizing those values. As a result, this often leads to a prioritization of short-term gains over long-term strategies.
IPO Process
There are several reasons why a company goes public. They include raising funds for expansion, unlocking value for shareholders, and more. The IPO process usually involves the following steps:
Investment Bank Recruitment
Companies initiate the IPO process by consulting with investment banks and underwriters. This group assesses the company's financial situation and subsequently formalizes the underwriting agreement, which outlines the targeted amount to be raised and the types of securities to be issued.
Preparing the DRHP and RHP along with SEBI registration
The next step involves submitting the registration statement, which is a requirement under the Companies Act, along with the Draft Red Herring Prospectus (DRHP). This document encompasses all essential financial data, insights about the business and industry, information about management, estimated price per share, strategic plans, risk assessments, and other necessary disclosures.
These documents must be submitted to the local Registrar of Companies at least three days before the bidding opens to the public. Following that, the Red Herring Prospectus (RHP) is prepared for submission to SEBI, including the mandatory warnings and relevant details.
Once all SEBI guidelines are met and disclosures are made, the company receives approval to proceed. Occasionally, the application may be returned with comments, which the company can address and refile for registration. Once approved, the IPO date is established, and the financial prospectus is released accordingly.
Stock Exchange Application
The company now has to finalize the stock exchange where it will list the shares. Companies can choose to list on both BSE and NSE as well .
Roadshows
In the two weeks leading up to the IPO, company executives typically embark on a nationwide tour to engage potential investors, particularly Qualified Institutional Buyers (QIBs) located in key financial centers. Their goal is to generate interest by sharing essential data. Additionally, some large investors may be offered the opportunity to buy shares at a predetermined price before the company officially goes public.
IPO Pricing
The price band is established through two primary methods. The fixed price method involves collaboration between the company and underwriters to determine a share price based on a thorough analysis of relevant factors. Alternatively, the book building method allows for setting a price band within which investors can place bids for shares, with the final prices influenced by demand, the bids received, and the targeted capital. Companies have the option to set a cap price that’s 20% above the floor price, and the bidding books are kept open for three days for any adjustments. Additionally, it’s noteworthy to mention the IPO GMP, or grey market price, which represents the premium investors are willing to pay before the shares officially list on the exchange.
Going Public
The application forms will be released to the public on a specified date, and individuals must complete these forms and submit them along with their payments. Typically, the Securities and Exchange Board of India (SEBI) has set this submission period at five working days. Companies must strategically select the timing of their share offers to optimize their sales outcomes. After the bidding period ends, the final prospectus is submitted to both SEBI and the Registrar of Companies (ROC). In general, investors receive their full allotment of securities unless there has been an oversubscription, in which case refunds are issued. Following the allocation of securities, the market will begin trading the IPO, and shares will be allocated to bidders within ten days of the final bidding date.
Follow-on Public Offer (FPO)
While many are familiar with the concept of an Initial Public Offering (IPO), the Follow on Public Offering (FPO) remains lesser-known.
An FPO, or Follow-on Public Offering, is when a publicly listed company seeks to raise more capital by issuing new shares to its existing shareholders or the general public. Unlike an IPO, which marks the company’s first public venture, an FPO involves firms that are already on the stock exchange. The main goal of an FPO is to secure funds for various needs, such as business growth, financing acquisitions, paying off debts, or fulfilling other financial requirements.
Now that you know the meaning of FPO, let’s understand its different types.
Diluted FPO
In a diluted Follow-On Public Offering (FPO), the stakes for existing shareholders decrease. The company opts to issue new shares to the market, which raises the total number of shares available. As a result, the percentage of ownership held by existing shareholders declines since the new shares carry their own share of ownership in the company.
Non-diluted FPO
In a non-diluted Follow-on Public Offering (FPO), existing shareholders retain their ownership stakes since no new shares are created. Instead, shares that are made available to the public come from current non-public shareholders. These typically consist of the company’s promoters, directors, or pre-IPO investors who are selling their existing shares to the market.
Companies opt for an FPO due to several reasons. Some major ones include:
Companies frequently opt for a Follow-on Public Offering (FPO) to finance their growth strategies, like launching new production facilities, tapping into new markets, or acquiring businesses that complement their existing operations. The extra capital garnered from an FPO can serve as a crucial financial resource to support these ambitious growth initiatives.
Companies often turn to FPOs as a strategic way to alleviate their debt burdens. By generating capital through equity offerings, businesses can settle existing loans and outstanding debts, which contributes to enhanced financial stability and strengthens their creditworthiness.
- Enhancing Working Capital
Businesses experiencing cash flow challenges or aiming to enhance their financial stability might opt for a Follow-on Public Offering (FPO). The raised funds can be used to support working capital needs, facilitating seamless daily operations.
In some situations, current shareholders may want to lower their investment in the company. A follow-on public offering (FPO) provides them with the opportunity to sell their shares to new investors, resulting in a smaller ownership share for them.
Benefits of FPO for a Company
FPO brings several benefits to a company. Some of them are:
An FPO allows companies to access the secondary market for extra capital. By issuing new shares, businesses can draw in investors and secure funding without taking on large amounts of debt, making it a more sustainable option for financing growth.
- Market Visibility and Credibility
Conducting an FPO allows companies to reinforce their presence in the market. It signifies their growth potential, stability, and confidence in their business model, which can enhance their credibility among existing and potential investors.
For current shareholders, a follow-on public offering (FPO) presents a chance to capitalize on their investments. By establishing a dynamic market for shares, FPOs allow shareholders to sell their stakes and cash in on their profits if they wish to do so.
Initial public offerings (IPOs) typically involve establishing a specific price for the new shares being issued. This not only aids in determining the fair market value of the company’s shares but also offers essential insights for both investors and the business itself.
FPO Impact in the Secondary Market
An FPO plays a significant role in the secondary market, where investors engage in buying and selling securities that have already been issued in the primary market. When a company announces an FPO, it tends to drive up trading activity and can lead to increased volatility in its stock.
Investors take a close look at the specifics of the offering, the company's track record, and its potential for growth prior to making any investment choices. A well-executed Follow-on Public Offering (FPO) can boost market confidence, drawing in more investors and possibly increasing the company's stock price.
How to Participate in an FPO?
The process of applying for a Follow-on Public Offering (FPO) is quite similar to that of an Initial Public Offering (IPO). Investors can take part in an FPO by placing orders through their brokers, just as they would during an IPO. Interested parties need to submit their applications via their preferred brokerage firm.
FRAS International LLP provides advanced features that simplify your participation in a follow-on public offer. You'll have access to all the essential information needed to make a well-informed decision. Check out this video to see the information we provided to investors regarding the Ruchi Soya Industries FPO.
The Final Word
Investors tend to view Follow-on Public Offerings (FPOs) as a more appealing investment choice for a variety of reasons. Unlike Initial Public Offerings (IPOs), which come with a higher level of risk due to the limited information available about the company, FPOs are seen as relatively safer options. This perspective is shared by both novice investors and seasoned individuals. The key advantage of an FPO is that it allows investors to closely evaluate and analyze the company’s performance through both technical and fundamental analysis.
Taking a close look at the company's performance, financial metrics, market trends, and other important aspects allows investors to make better-informed choices, which ultimately helps lower their sense of risk.
