What is Public Issue
Every company in the market needs capital to operate its business. This requirement of capital can be for the short-term or the long-term.
If a company wants money for a short period, it may go to banks or lenders where these entities could lend money to the company but if the company requires funds for a longer duration then it has 2 options: either raise debt funds or go for equity funds. The former is the same as borrowing money from lenders or financial institutions while the company get equity funds from the investors by issuing shares to them.
A company can issue its shares in many ways.
What is Public Issue
When a public limited company raises capital by issuing its fresh and new shares to the public it is called a public issue.
The company could be a listed company or an unlisted company.
An unlisted company is a public company that is neither listed on a stock exchange nor its shares are traded in any stock exchange while a listed company is one that is listed on the exchange and its shares are also traded among investors.
Types of Public Issue
There are 2 types of public issues: IPO ( Initial Public Offer) and FPO (Further Public Offer).
1. Initial Public Offer
- When a company makes a public issue for the first time, it is known as IPO.
- IPO is the first time when an unlisted company issues its shares to the public.
- Issuing IPO is riskier than FPO as the company is entering the stock market by issuing its shares for the first time.
2. Further Public Offer
- When a company issues its shares for the second time after IPO, it is known as FPO.
- If a company is coming up with FPO it means that the company is already listed on the stock exchange.
- An FPO contains less risk than an IPO as the investors are already aware of the company’s performance and have a fair idea about its growth opportunities.
- FPO is also known as “Follow-on Public Offer”.
The segment "types of public issue" is something which confuse most of the people as the content out there on internet is enough to confuse them. The confused people get this information that public issue are of 3 types. Some of them think these types are: IPO, FPO and OFS (Offer for sale) and the rest think that it is: IPO, FPO and Rights Issue. We know that in Public issue a company issue its fresh and new shares to the investors or general public. Whereas during OFS, the shares held by the promoters are issued which aren't the fresh shares and in Rights issue, shares are issued to the existing shareholders of the company and not to the whole public.
Method of pricing in public issue
As the company issues its shares either by IPO or FPO, it is issuing shares to raise capital but how much? It is decided by the issue price per share i.e. how much money the company wants per share
There are 2 pricing methods by which the company can decide the issue price:
1. Fixed price method
In a fixed price issue, shares are issued at a fixed price. In the prospectus, the company has to give the reasoning and proper justification for the price fixed.
Generally, companies go for fixed price issues only when the management is completely sure that a fair price can be decided among them without having tested in the market like in the case of book building.
2. Book building method
In the book building issue, instead of fixing the price for each share company come up with a price band and the investors then decide, how much price they’re willing to pay for one share.
This is the method used for efficient price discovery and determination of the number of shares to be issued. The price at which the shares would be offered is not known initially. It is known only after the closure of the book-building process.
A public issue is a way for a company to raise capital by issuing its shares to investors. It is of 2 types, one is IPO and the other is FPO. Through IPO, the company issues its shares for the first time to the public and gets listed on the stock exchange while if the company is coming up with FPO then it means that the company, which gets listed on the exchange, requires more capital from the market.
A company can issue its shares either at a fixed price or can give this responsibility to the investors to discover the price within the price band.