An initial public offering is a process by which a company is first introduced to the stock exchanges. The promoters of the company offer a percentage of the shares to the public in an initial public offering. Chapters 4 & 5 provide detailed information about the reasons for an IPO and how it works.
Going public is primarily done to raise capital for expansion projects and cash out early investors. The IPO will be listed on the exchange. However, the promoters might still need additional capital. There are three options: Offer for sale, Rights Issue, and Follow-on public offer.
Promoters can offer new shares to existing shareholders at a discount price, generally lower than the Market Price. The company will offer new shares in proportion to the shares held by shareholders. A 1:4 Rights Issue, for example, would offer 1 additional share for every 4 shares. This option is attractive, but it restricts the company's ability to raise capital from small investors who may not wish to invest further. Rights issues allow for the creation of new shares which are offered to shareholders. This dilutes the existing shares' value.
South Indian Bank announced a 1 to 3 (one share for every three held) rights issue for Rs 14. This is 30% less than the market price at which the stock traded (Rs 20 as of Record date 17 February 2017). To existing shareholders, the bank offered 45.07 million shares.
Chapter 11 covers key Corporate Actions and the rights issue.
Promotors can offer secondary shares to the entire market. This is in contrast to a rights issue that is only available to existing shareholders. The Offer for Sale is offered through an additional window at the Exchange. If Promoters wish to sell their holdings or maintain minimum public shareholding requirements (Govt.), the exchange will allow them to route funds through OFS. PSU must have 25% public shareholding.
The company sets a floor price at which retail and non-retail investors can bid. If there are any bids at a cut-off or higher, the exchange will allocate the shares to the investors. These funds will be deposited into the investor Demat account within T+1 days.
NTPC Limited is an example of an Offer to Sell. It offered a maximum of 46.35 million shares at a floor of Rs 168 and was fully subscribed within the two-day period. The OFS was conducted on 29th August 2017 and 30th August 2017 for Non-Retail Investors.
A FPO is a company that has the same goal of raising additional capital after it is listed. However, an FPO uses a different process for applying for and allotting shares. An FPO can offer new shares or dilute existing shares. An FPO, just like an IPO requires that Merchant Bankers are appointed to create a Draft Red Herring Prospectus. After approval by SEBI, bidding can be allowed within a 3-5-day period. ASBA is a place for investors to submit bids. Shares are allocated based on the Cutoff Price determined after book-building. FPOs have been less popular since 2012's introduction of OFS. This is because of the lengthy approval process.
The price band is determined by the company and publicized. Prospective investors have two options: they can either bid online through an ASBA portal or by applying offline at a Bank Branch. The cut-off price, determined by demand, is announced after the bidding process has been completed. Additional shares are then listed on the exchange to trade in secondary markets.
Engineers India Ltd is an example of an FPO. It was issued in February 2014 with Rs 150-Rs 145. The issue was 3 times oversubscribed. On the date of issue, the shares were traded at Rs 151.1. The market price was 4.2% lower than the lower price band.