In the previous article, we discussed the debt and equity instruments used to raise capital for a company. When the owner of the private company wants to raise additional equity funds, then the company comes with an initial public offering ( IPO) i.e it will offer shares of the company to the public for the very first time.
These funds can be used to expand the business or if they need money to meet the day to day expense in a company (working capital) or it can also be to repay some other loans borrowed by the company. By repaying the existing loan the interest payment is reduced and to that extent profit is reserved and it can be used for growth or pay to the investors as dividend.
What is FPO?
In later stages, if the company needs more money and issue second round of fresh shares then it’s known as FPO (Follow up public offering).
Why promoters sell their own share?
If the promoters (owners) sell their own shares instead of creating fresh shares then it is known as OFS (Offer for sale). Sometimes promoters may sell their shares post IPO only because of SEBI norms i.e for any listing company promoters should not have more than 75% shares of the company.
Rights issue : It’s an invitation to the existing investors for buying more shares mostly at a discount to the existing market price.
Once the fresh shares are issued through IPO , then all these shares are traded in the Secondary Market.
There are Various categories of investors for an IPO.
- Retail individual investors – Common public – when people invest less than Rs. 2 lakh.
- HNI – High Net worth Individual – When people invest more than Rs.2 lakh .
- DII – Domestic Institutional Investors like Domestic Banks , Insurance ( like LIC ) etc ., LIC is one of the largest investors in Indian market.
- FII – Foreign Institutional Investors.
Note: Anchor investors are the one whose shares are locked in for a certain number of years after the IPO is issued. Angel investors are wealthy high net worth investors who invest at a very early stage of a start-up to yield mega return from their investment. High risk – High return.