Initial Public Offering

What is Public Offering Price?

Public offering price is the price at which new stocks are offered to the public by an underwriter. In other words, it is the price at which the company decides to give the stocks to the public.

The main aim of the initial public offering is to raise money. The offering prices factors in the strength of the company’s financial statements, growth rates, profitability, market trends and investor confidence.

Furthermore, underwriters who determine the POP, set it at an attractive price to grab the attention of investors. However, the price is not low, but high enough to ensure the company can raise good money through the issue.

For mutual funds, the public offer price is the same as the Net Asset Value (NAV) of the fund. This is because most funds do not impose sales charges on their investors initially. However, for funds that charge the sales load, the public offering price is higher than the NAV. The POP is also the sum of the net asset value, and the sales charge an investor must pay to invest. The maximum allowable sales charge for a mutual fund is 8.5 percent of the POP or the total amount invested.

How does public offering work?

A public offering is the sale of securities to the public at large. When done for the first time, is called Initial Public Offering (IPO). In contrast, the sale of additional or exiting shares is a secondary offering.

Any company needs capital to expand or finance their shortfalls or working capital requirements. In events like these, the company sells new shares of existing shares in the market to raise money. Depending on the type of issue, the share price of the company is affected. An IPO lists the company’s share on the stock exchange, and a secondary offering will sell new or existing shares to the public. If new shares are sold, the company’s price will fall. However, if existing shares are sold, then the price will remain intact.

For IPO, a firm has to appoint an investment bank or underwriter. They help the company with the issue of shares to the public. Then the company has to submit all the required details to SEBI. Once SEBI checks and is satisfied with the details, the IPO date is announced. Once the IPO comes to the market, the public can buy the shares by applying. After the issue closes, the shares are allotted to the shareholders.

For a secondary issue, the major shareholder can directly sell the shares to the public subject to SEBI conditions. However, the process won’t be as tedious as an IPO.

Why do Companies do Public Offerings?

An Initial Public Offer is when a private company becomes public by offering shares to public investors. Companies go for a public offering to raise more capital. Following are some of the reasons why companies go for public offering:

1. Raise more capital

Usually, private companies raise money from shareholders, investors or venture capitalists. However, with the need for expansion, scaling up operations or other reasons, companies need a higher capital infusion. Therefore, to raise money for meeting such requirements, private companies often explore the option of going public.

2. Liquidity for existing shareholders

Shareholders invest money into the company, and some wish to cash in their investments. To monetize the shareholding, the best way is to go public. By going for a public offer, it gives access to the majority shareholders like private equity funds or the Government to sell their interest in the company. The stock price movements are based on the investor’s perception of the company’s performance.

3. The credibility of the company improves.

By going public, a few things about the company become more transparent. For example, financial data, management changes, etc. SEBI regulates all the public companies. It also ensures that all the data is reported on a regular basis. Therefore, when a company goes public, its credibility usually improves.

4. Larger shareholder base

With an IPO, the company gets attention from the public. Individuals start researching and assessing the company and start investing in it. This helps the company gain a larger shareholder base and market exposure.

Is a public stock offering good or bad?

Whether a stock offering is good or not depends on the offering type. An initial public offering can be good as it opens the door for current investors to quit their investment. At the same time, maximize the capitals that would help in future growth.

On the other hand, a secondary public offering is the sale of new shares of the company that is already listed on the stock exchange. The reasons for the secondary offer can be many, for example, to raise money for growth or expansion or further liquidity of shareholders, etc. The secondary offerings can be either dilutive stock offerings or non-dilutive stock offerings.

Stock offerings have their advantages and disadvantages; however, no offering is bad. To decide whether the offering is good or bad, one needs to understand the purpose of the issue.

Do public offerings lower stock prices?

Public offerings can be dilutive and non-dilutive. Depending on the type of issue, the price of the stock is affected.

Dilutive offering

A stock or share represents one part of ownership. The more number of shares one holds, higher is the ownership in that company. A shareholder holding more number of shares will have the right to vote in the important decisions of the company. Moreover, the person is also entitled to higher dividends. However, with the creation of new shares, comes a dilution of the company. This is because the earnings are distributed to a larger number of shares. The EPS or earnings per share will go down, and the P/E ratio of the firm will go up. Hence to maintain the P/E ratio, the share price will go down. Since the EPS is going down due to dilution, the price will also go down.

Non-Dilutive offering

Non-dilutive offering doesn’t involve the creation of new shares. A major shareholder of the company or the directors or promoters who have completed their lock-in period of holding the shares decides to sell his/her shares to the public, or any such events lead to non-dilutive offering. The number of shares of the company does not increase; hence the EPS and PE stay intact. Therefore the share price in non-dilutive offering doesn’t change.

What does a public offering mean?

The public offering is when an organization sells equity shares or any other financial instruments to the public to raise funds. The reason for the public offering can be to expand the business, fund working capital requirements, or to pay off loans. The public offerings can be the sale of existing securities or new securities. The securities offered in a public offering can be common equity or preferred equity. There are two ways a company can offer securities in the market, through IPO or secondary offerings.

An Initial Public Offering (IPO) is when a private company decides to go public and sells shares in the stock market. A secondary offering is when a company that is already public issues a second set of securities. The two types of secondary offerings are dilutive and non-dilutive secondary offerings. In non-dilutive offering, the existing major shareholder decides to sell their shares to the public, and all the sales proceeds go to them. A dilutive offering involves the creation of new shares and selling them to the public.

In non-dilutive offerings, no new shares are created, and the price of the security doesn’t change. While in a dilutive offering, new shares are created, and the price of the security falls.

• Check Out Follow on Public Offer (FPO)

Lates News on IPO

AMCs put stake in IPOs worth Rs 5000 crores

Mutual fund houses invested around Rs 5000 crore in IPOs. The highest investment is towards food-tech unicorn Zomato. With an inflow of Rs 22580 crores in equity schemes, AMCs invested Rs 4450 crores in Zomato, Rs 1083 crores on GR Infraprojects, Rs 210 crore in Tatva Chintan Pharma, and Rs 142 crore in Polex rings. Such massive equity inflow is due to the NFOs launched by AMCs in July.

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