.
An initial public offering is the issuance of shares for the first time by a private company, which is not listed on the stock exchanges. Post the issuance of such shares, the company gets listed on the bourses and its shares are then traded publicly.
.
Such a company issues equity to investors in exchange for capital. With this, its ownership also gets diluted.
.
.
Only those companies, which have been listed on the exchanges before, can go for an FPO. There are two types of FPOs known: dilutive and non-dilutive.
.
A dilutive FPO is where new shares are offered to public investors, which leads to an increase in the company’s outstanding shares. This dilutes its existing shareholding pattern.
.
On the other hand, a non-dilutive FPO entails the issuance of shares that are already in existence. This means that directors or founders sell their privately held shares in the market. This way, there is no increase in the number of shares for the company.
.
Dilutive FPO is generally undertaken to raise additional capital to fund growth or expand the equity base.
.
In some cases, it has been taken up to meet SEBI’s rule that mandates a listed company to have a minimum of 25% public float.
.
Ruchi Soya came out with the dilutive FPO as the Patanjali Group owned about 98.9% stake in the company while public shareholders owned only 1.1%. After the issue, the public shareholding rose to 19%.
.
For instance, the FPO by FMCG company Ruchi Soya was taken to raise its public shareholding to meet SEBI’s requirements.
.
.
While the issue price for an FPO is mostly fixed lower than the prevailing stock price. This is done to drive higher participation.
.
That said, an IPO is believed to be more profitable than an FPO as investors participate in the expansion phase of the company. Earnings per share decreases due to the issuance of new shares in a dilutive FPO.
.
An IPO, hence, also comes with higher risk as investors can only use the information provided by the company to gauge its growth prospects.
.
Dear Reader,
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.
Digital Editor
