3.3 Types Of Public Issue of Shares

DIFFERENT TYPES OF PUBLIC ISSUE OF SHARES

A public issue refers to issue of securities like equity shares or bonds and debentures but let us mainly focus on equity shares. 

  • Initial Public Offer (IPO).
  • Follow-On Public Offer (FPO) or Seasoned Issue.

Initial Public Offer (IPO):

Simply put, an IPO is a company’s first sale of stock/shares to the public. The investing public is usually excited about an IPO. It is hard to understand why since most stocks that are sold during an IPO tend to perform badly at the initial stages. Some companies also do not survive. So investing in an IPO is also risky and usually less rewarding than investing in more established stocks. Perhaps investors believe the sales hype that usually accompanies an IPO. Perhaps they are excited about being among the first to own the next potential IBM or Microsoft.

IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock or share will do on its initial day of trading and in the near future since there is often little historical data with which to analyse the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

Some IPOs do very well right from the start, and it is these IPOs that are remembered. The IPOs that fail are quickly forgotten, while stories of successful IPOs are re-told and their returns frequently exaggerated. However, the active involvement of SEBI and others in protecting the interests of investors has helped to reduce the risk factor to a certain level. Reliance Power was listed on the stock market after its IPO and its share value went down by 21 per cent and closed at Rs 373.5 on the BSE as compared to its issue price of Rs 430 for the retailers. 

It had made many first-time investors jittery on the listing day and no one had expected it to go so below the par value. In fact, it even reached a low rate of Rs 355. Reliance Power later issued a 3-for-5 bonus share in an attempt to cheer the shareholders after a miserable debut following a record USD 3 billion initial public offer. Shareholders other than the founders received three bonus shares for every five that were held, effectively reducing the cost of the shares to Rs 269 (USD 7) for retail shareholders compared to a discounted IPO price of Rs 430

Follow-On Public Offering:

When a company is not listed to trade on any stock exchange and offers to the public its shares for the first time with a view to getting listed, it is known as a first time issue. It is listed after the IPO is complete and shares allotted. A follow-on public offering is made by listed companies for raising additional funds. The shares of such companies could be bought either from the stock market or in the public offer. For example, some of you may remember that in June 2007, ICICI had come out with a FPO to raise further capital.

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