On our site, we have already discussed IPO or initial public offering in detail. Previously, we also ran a very popular section on our site for upcoming IPO reviews. In this article, we will discuss different types of share issues like IPO, FPO, Right Issue, and Preferential Issue and we will see what are the differences between them.
What is an IPO?
Whenever a company wants to raise money from the market for the first time, it can do so by IPO. When a company starts its operation, it is started on its own money or takes a loan from the banks or some outside investor invests in the same, who has an idea that the company can grow in the future. But as and when a company grows they need to come up with an IPO to raise money from the market because they want to reduce the bank loans or the initial investor may want an exit.
The investor has invested at a time when the company was very small and no one had faith in it. But now the company has created a base and some future is now visible with the initial investment. So the investor may want to book profits and take back his share. Now retain investors may also become interested in the company because its future prospects are visible now. Now the company can approach retail investors with their future prospects and ask for investment from them. This is called an initial public offering or IPO. So we understand the meaning of the first term in our discussion of IPO FPO Right Issue and Preferential Issue.
Reasons for Coming up with an IPO
A company comes up with an IPO for various reasons. The initial investor or promoter can withdraw a part of their capital. The company can repay or pre-pay bank loans. Or the company needs more money for its expansion. So whenever a company wants to come up with an IPO, they have to take the permission of the regulator called SEBI. SEBI performs an investigation on the company’s business and operations and checks if the company has fulfilled all the norms and approves the IPO accordingly. A company is approved by SEBI to come up with an IPO, does not mean that SEBI is recommending the issue. It only means that the company has fulfilled all the norms.
Processes of Coming up with an IPO
Now, who decides the IPO price? The promoters of the company along with the merchant banker decide the IPO price, based on their future projections. The merchant banker helps a company in fulfilling IPO norms and completing documentation (draft red herring prospectus). This means they complete all the jobs related to filing an IPO. Check the image below to understand the role of a merchant banker.
Sometimes IPOs are in fixed-price type and sometimes a price band is given. Now how can you apply to an issue? Nowadays all processes of applying for IPOs are online. Another thing investors must keep in mind, you are applying in an IPO, does not mean that you will get the allotment. This is because, in times of oversubscription, exchanges do the allotment process by lottery.
Previously till the IPO allotment is done the money used to be locked in with the merchant banker. But nowadays your money is kept in your bank only, only it is kept locked. You can not utilize that money somewhere else till the IPO allotment status is out. Now, if you don’t receive an allotment of an issue your money banks will immediately release your money. So, like in previous days your money is not kept locked for 4-5 months.
What is FPO?
There are many ways of raising money from the market. They are IPO, FPO, Right Issue, and Preferential Issue. We have already understood what is IPO. The other form of raising money from the market is called FPO. FPO means Follow-on Public Offer. If a company’s stock is already listed on the stock market but still they need more money, they can come up with an FPO. The full form of FPO is Further Public Offer or Follow-on Public Offer. Generally, a company keeps the FPO price somewhat discounted to the current market price, so that the investors become interested in the issue.
What is the Right Issue?
So we have discussed the second term too in our today’s topic of “IPO, FPO, Right Issue, and Preferential Issue”. There is a third way of raising money from the stock market. That is called Right Issue. The right issue is a right to invest in the company for a person, who is an existing shareholder of the company. So if are an existing shareholder in Jubilant Foodworks, you can apply in their right issue. Once again the Right Issue offerings are lower than the market price, sometimes even companies offer the right issue at a discount of 20%-25%. This is a gratitude the companies show to the existing shareholders.
What is a Preferential Issue?
The fourth way of raising money from the market is a preferential issue. Here the company provides one kind of preference to an investor’s group or to the promoters of the company to invest in convertible shares. Now the preference issues are not shares and investors can not sell them right away. But after a fixed time they will be converted to equity shares and can be sold in the market. So, in this case, the preferential shares have a lock-in period.
A preferential issue is a way of raising capital whereby the company issues new shares to pre-selected investors only, while a right issue is when shareholders are granted entitlement in terms of rights to purchase additional shares before they are available publicly.
The primary difference between a right issue and an FPO (follow-on public offer) is that in an FPO, existing shareholders do not have priority over the general public for subscribing to additional shares.
With an IPO (Initial Public Offer), stocks or securities issued by a private enterprise become available for trading to the general public for the first time, whereas with an FPO these same stocks or securities already available on the market proceed with another offering at different prices.
One of the key differences between an IPO and rights issues is that IPOs allow holders of newly issued stock to benefit from any initial surge in its price due to increased demand while rights issues mostly provide existing shareholders with extra voting power rather than long-term returns on investments.
So, friends, we have discussed what are IPO, FPO, and Right Issue, and we have also discussed what is Preferential Issue. These are ways by which companies raise money from the market for various reasons. The main similarity between all the issues is that companies launch all of them in the primary market. That means you can invest in them out of the regular market where active trading is taking place. Once investors invest in them in the primary market, they can sell them in a secondary market. I hope you got answers to many of your queries through this post. Specially newcomers will have their ideas clear. I will love to answer your queries on the IPO, FPO, Right Issue, or Preferential Issue in the comments section below.