IPO Full Form- IPO stands for Initial Public Offering. Initial Public Offering (IPO), Offer For Sale (OFS) and Follow On Public Offer (FPO) are the fundamental ways of raising money from the Stock Market by the company. The company raises funds from the market for various reasons like expansion, paying the debt, and launching new products and services. The detailed information is available in the Draft Red Herring Prospectus (DRHP) filed with SEBI (Securities and Exchange Board of India). One can download the DRHP by visiting the website www.sebi.gov.in.
Primary and Secondary Market
There are two types of markets, i.e., Primary Market and Secondary Market. In a Primary market, new Securities and Bonds are issued. It is also known as the new issue market. One example of a primary market is IPO. In IPO, new shares are issued. After the allotment of shares, it gets listed on the Stock exchange. The Stock exchange is an example of a Secondary market. In the Primary market, the funds raised through IPO go directly to the company, and it uses the funds as described in the Red Herring Prospectus. When shares come to the secondary market (i.e., listed on the stock exchange), money and shares are exchanged between investors.
IPO
When a Company wants to get listed on the stock exchange to raise funds from the public or investors, it comes up with an IPO. Through IPO, it gets listed and sells shares to the public and raises funds from the public. Likewise, the company gets funds from the public or investors and investors to become shareholders.
IPOs are of two types:
Fixed price issue and Book building issue
In a Fixed price issue, companies determine a fixed price, and investors are to apply for the shares at the fixed price. The investors know the share price before the company gets listed. At the same time, the Book building issue is a process of price discovery. The company decides a price band in the book building issue, and investors submit their bids in this price band. The lowest price is called the Floor price, and the highest price is called the Cap price. The investors know the price after the company gets listed on the Stock exchange. The issue needs to be opened in IPO for at least three working days but not more than 10 working days.
After allotment of shares to the investors, it gets listed on the stock exchange. The shares may be listed at a premium or a discount. If it is oversubscribed, it gets listed at a premium, or undersubscribed, it gets listed at a discount. In IPO, we cannot buy 1 or 2 shares, we have to buy shares in lots and multiple lots, and the company decides a lot.
OFS
In OFS, the promoters of the companies listed on the Stock exchange sell their stake, and in return, the funds go directly to the promoter. In OFS, promoters’ ownership is transferred to the public. OFS facility started in 2012. As per market capitalization, promoters of the top 200 companies only can sell their stake. According to SEBI rules, the public’s shareholding pattern should be at least 25%. To meet these minimum criteria, promoters have to sell their stake.
FPO
When a listed company comes up with another round of fresh funding offers, it is called FPO. Many companies bring Rights Issue in place of FPO, in which new shares are offered to the existing shareholders.
Conclusion
In IPO and FPO, the fresh shares are issued to the public out of unissued capital, whereas in OFS, shares are issued out of promoter holding. In OFS, no fresh shares are issued. IPO and FPO processes are long, while the OFS process is slow. Investing in an IPO is a bit risky as you do not have much information about the company. However, an FPO is a relatively safer bet. Investing in an IPO requires much more research than FPO.
Also Read: IPO Full Form
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