What are different types of IPOs

As every investor already knows, the sole purpose of an IPO is to raise funds. For raising funds, companies take different routes to value their stock price during an IPO. 

But were you aware that actually there are different types of IPOs that can be used to raise funds? 

Well, companies that want to raise an IPO, evaluate these different types of IPO and choose the type will be more beneficial to them. Even for investors, knowing all these types of IPOs and knowing why a company has chosen to opt for any particular IPO is crucial to decide whether it will be a fruitful investment or not.

Want to understand why?

Let’s dive into the topic and understand the different types of IPO.

Fixed Price IPO 

Under this process, the IPO share price is fixed beforehand and is then offered to the public. This price is generally set by assessing the total assets, liabilities, and every other financial aspect of the company.  The IPO price does not depend upon its demand. The total demand for that Initial Public Offering is understood only after the issue is closed.

Book Building IPO 

In a book building IPO, the price is finalised in the course of the process of IPO. There isn’t any fixed price, but a price range. The price range is decided based on the company’s financials, the achievement of the roadshows, and existing market circumstances. The lowest price in the price range is the ‘floor price’, and the highest price is the ‘cap price’.

The investors are allowed to bid for any number of shares, along with the price they are willing to pay. The quoted price must be inside the price range. Eventually, the share price is determined based on the bids. The demand for that IPO is announced each day as the book is developed.

Maximum companies use the book-building exercise. Private businesses present IPOs proposing to raise capital. A company can’t issue an extra IPO once it is listed in the stock exchange.

Difference between Fixed Price and Book Building Issue

Yet, listed companies can issue shares to the public again. They can do so using a follow-on public offer (FPO) or an offer for sale (OFS).

Follow-on Public Offer 

A follow-on public offer (FPO) involves the selling of additional shares by the company.

An FPO is a normal strategy used by listed companies to raise further capital. This is also known as a secondary offering. For instance, there is a company named ABC, which is a listed company. It needs to sell further shares to raise extra capital.

For this, company ABC would employ an investment bank to underwrite the offering, record it with the Securities and Exchange Board of India (SEBI) and then control the sale of the secondary shares.

Fundamentally, there are two types of FPOs:

• Dilutive FPO

In the situation of a dilutive FPO, the company’s board of directors consents to intensify the share float to sell extra equity in the market. Typically, this type of FPO is issued to raise capital to decrease current debt or enlarge the business. 

• Non-dilutive FPO

In non-dilutive FPO, existing shareholders of privately held shares (which are promoters, the board of directors and pre-IPO investors) offer their shares in the stock market.

Most often, when the initial IPO has a lock-up period, and the lock-up period ends, then a non-dilutive FPO takes place. In the lock-up period, promoters and board of members are barred from selling their shareholding, to fill a confidence in the market and to stabilize the IPO.

Consequently, a non-dilutive FPO provides these shareholders with a means to monetize their position. As prevailing shares are being sold again, the company does not gain in any way. All the profits go straight away to the shareholders.

Follow-on offerings are very normal in the investment business. It can be utilized by companies to raise some additional capital for expenditures and enlargements.

Sometimes, companies may confront an opposite response from the market as the companies are decreasing their shareholding, after which the shares will be left on the mercy market forces, which will eventually affect the earnings of the company.

Certain precise traits of an FPO comprise:

• The price of a follow-on public offering (FPO) depends on the market forces
• Investment banks or underwriters employed on an FPO intend to concentrate on the current market price instead of performing the full valuation of the company.
• FPO process is done through the ASBA process which means that investors have to make payment after the shares are allotted to them 

Offer for Sale 

Offer for sale OFS is a method in which promoters of the listed company can sell their shareholding through the bidding platform provided by the stock exchanges. Non-promoters owning no less than 10% of the share capital of a listed company are also permitted to use this choice. 

In layman terms, when promoters desire to reduce their ownership in a company, they offer their shares to the larger public. The recent example of OFS was IRCTC OFS which happened on 11th December 2020 at a floor price of Rs.1367.

SEBI introduced the OFS mechanism in the year of 2012, to provide a platform where promoters of the company can sell off their shareholding and reduce their shareholding in the company.

Advantages of OFS:

• As the system is platform-based, there is no requirement for a listed company to fulfil any applications.
• In the scenario of no allotment, money is reimbursed on that day itself.
• An investor can place multiple bids beyond the floor price established by the company. 

Weaknesses of OFS:

• SEBI has authorized conditions for particular types of investors.
• No allocation will be done if the investor’s bid is below the floor price.
• Modification in the OFS bid is not allowed.

There is some significant difference between OFS and FPO. OFS takes just one-day trading session whereas FPO takes 3-5 days to raise funds.  OFS doesn’t require a lot of paperwork whereas FPO requires a company to make a prospectus and approval from SEBI before launch. Investors cannot make multiple bids in FPO. On the other hand, OFS investors buy shares in bundles. 

This shows that OFS saves lots of time of the company and as well as of the investors. It is less time consuming, and it is less complicated as compared to FPO. 

Closing Words

A company has a variety of choices for introducing an IPO, and it can choose any type of IPO as per its needs and requirements. All the methods have their own pros and cons. The company, along with its underwriting teams, evaluate the methods and choose the method which is best for them. 

However, it is equally important for investors to know about these types of IPO in order to better understand the crux behind any IPOs.