Initial Public Offer
The first time a company goes public it does so through an Initial Public Offer. It is a process through which the company raises capital from investors by offering their shares in the market. Remember, when a company issues new shares through an IPO, or sells a portion of its stake for the first time to the public, it creates a market float i.e. the number of outstanding shares that are going to be with the Public. It does so for a variety of operational reasons. For instance a company may issue new share (go public) to expand its business or to service a pending debt burden. It also gives the angel investors or the Venture Capitalists in the company a chance to sell their shares.
Investors look forward for opportunities to participate and purchase the shares of the newly listed companies, and therefore understand the allotment process clearly. Before the change of the rules by SEBI, the investors that made the most number of bids had the highest probability of getting the shares allotted to them. This has now changed. The rule modification has changed the dynamics of the bidding procedure. After the rule change by SEBI in August of 2012, every retail participant will get allotted a certain number of shares, though subject to the availability.
Different Categories of Bidders:
First, there are the Retail Independent Investors (RIIs). These are those investors that apply for up to INR 2,00,000 for a single application (the minimum prescribed is INR 10,000-15,0000) for an IPO. This amount, say INR 2 Lac is divided by the price band to get the number of shares applied for. Of course the lot size for the IPO is clearly mentioned and the investor would keep this mind while making the bids. Generally, the RIIs are given an allocation of 35% of the issue in Book Build IPOs.
The second category is that of the High Net worth Individuals (HNIs) or the Non Institutional Bidders (NIBs). These are the participants that bid for a total more than the INR 2 Lac limit set for the RIIs. The allocation to this category of investors is 15% of the total issue.
The last category is that of the Qualified Institutional Bidders or the QIBs. Financial Institutions, Banks, Mutual Funds, Insurance companies and FII’s form this category. Looked from a different stand point QIBs participate in IPOs on behalf of the retail investors who have applied in IPOs.
It is important to note that the ratio of allotment in a book built IPO is 35:15:50 for the RIIs, NIBs and QIBs. The RIIs and NIBs are permitted to withdraw their bids after the close of the IPO whereas the QIBs are prohibited from doing so.
Documents required to participate in an IPO:
An applicant should have a Demat account and a Trading account to place his/her bids in an IPO. The documents required for this are:
- PAN Card of the applicant
- Address Proof
- 3 Passport size photographs
- A cancelled cheque
FPO: Follow On Public Offer
In layman terms, this could be considered as round 2 for the company to raise funds from the market. Though similar to the IPO, the company must issue new shares that are to bid by the public. If no issue of new shares is done then it cannot be a Follow-on Public Offer. The company that undertakes an FPO, is already listed in the stock exchange. Through a new stock issue, public companies can raise more capital from the public but this is done so by diluting their (the existing shareholders) share to a certain extent.
Offer for Sale
It is quite different from a FPO. In an OFS the promoters want to sell their holdings by selling their shares (complete or a portion of their holding) to the general public. The basic difference is that in a FPO a fresh issue of shares is done, whereas in an OFS no fresh issue is made. The fresh issue of shares is done in a FPO or an IPO. Moreover, the OFS was brought as a mechanism to help marginal shareholders to liquidate their ownership. Here, the money goes directly to the promoters and not to the company. The money is not used for operational purposes of the company nor is it used for debt servicing. Another difference is that the in case of an OFS, the process is far quicker and is completed in a shorter duration of time. For instance when the government of India wanted to dis-invest their holding in Coal India, they chose to take the OFS route. It lasted only a single day, whereas an FPO for Engineers India Limited lasted for a week.
The critical point here is that only promoters or shareholders with over 10% stake in the company can come up with such an OFS. Moreover, only companies in the top 200 (in terms of market capitalization) can undertake an OFS.