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Pubic Issue, What is Public Issue, Pubic Issue of Shares, Public Issue Meaning
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 and Public issue is one of them;
Now let’s discuss 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.
There are 2 types of public issues:
👉IPO ( Initial Public Offer)
👉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”.
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.
The process of public issue of shares in India typically involves the following steps:
- Appointing Merchant Bankers: Before undertaking a public issue, an issuing company must appoint a merchant banker as the lead manager for their public issue process. This person will coordinate with all stakeholders, such as the company’s underwriters and intermediaries involved with its launch.
- Due Diligence: Merchant bankers will conduct due diligence on your company’s financials, operations and other relevant aspects to ensure its public issue is structured and marketed appropriately.
- Drafting the Prospectus: With assistance from its lead manager, a company drafts a prospectus which contains all pertinent details about itself, its operations and its public offering. In particular, this document includes details regarding the issue price, size and terms & conditions of this public offer.
- Filing of Prospectus: Once prepared, a prospectus must be filed with both the Registrar of Companies (ROC) and the Securities and Exchange Board of India (SEBI) for their approval. ROC checks that it complies with Companies Act regulations, while SEBI reviews compliance with its guidelines.
- Marketing the Public Issue: After their prospectus has been approved by SEBI, issuer companies and merchant bankers begin marketing the public offering through various channels such as advertisements, roadshows and promotional activities to attract investors.
Once the public issue closes, the lead manager finalizes the allotment of shares to investors while returning funds to unsuccessful applicants.
Once the allotment of shares has occurred, they are listed on stock exchanges, and trading commences.
Advantages of Public Issue
Here are some of the advantages of public issue:
- Raising Capital: Public issues enable companies to quickly tap a pool of investors to raise large sums of money for growth, expansion or other strategic initiatives.
- Increased Visibility and Credibility: Going public can help a company increase its exposure among customers, suppliers and other key players – helping increase sales, market share and access to new opportunities.
- Accessing Capital Markets: Public companies can utilize capital markets to raise additional funds through either debt or equity offerings.
- Liquidity: Publicly held shares typically offer greater liquidity than privately owned ones, making them easier for investors and companies alike to trade on the open market.
- Exit Opportunity: Publicly traded shares provide venture capitalists and private equity firms an attractive exit opportunity that allows them to realize their investment and generate returns on their capital investment.
What is Public Issue Management
Public issue management refers to overseeing the distribution of securities issued to the public by companies seeking to raise capital.
Professional expertise from investment bankers, lawyers, accountants and marketing specialists is crucial to its success.
Public issue management is an integral component of raising capital from the public, governed by SEBI (Securities and Exchange Board of India), which has set forth guidelines and regulations which companies and intermediaries must abide by to ensure transparency, fairness and investor protection throughout this process.
The Securities and Exchange Board of India (SEBI) is the regulatory body that oversees public issues of securities in India.
SEBI has created guidelines that must be observed when issuing securities to the public; here are some SEBI public issue guidelines in bullet format:
- Before issuing securities to the public, companies must submit a draft prospectus to SEBI for review and suggestions before final prospectus filing.
- Once submitted, SEBI will assess any necessary changes before the final prospectus filing is due.
- Prospectus requirements must include all pertinent details about a company, such as its financial statements, business model and any potential risk factors associated with investing in its securities.
- Companies must disclose details of their promoters, directors and key management personnel and any transactions between related parties in their prospectus.
- A public issue must have a minimum size requirement of Rs 10 crores for an initial public offering (IPO).
- According to regulatory requirements, institutional investors must receive at least 75% of the net offer and up to 25% may be allocated to retail investors.
- Companies should appoint a registrar of issues to address all investor complaints and ensure shares are distributed fairly.
- Companies must appoint a merchant banker to oversee the issue and comply with SEBI guidelines.
- At the same time, investor funds must be kept in an escrow account until shares have been distributed to investors.
Be mindful that these guidelines may change over time; companies must consult the SEBI website or a professional advisor to follow the latest set of instructions.
Public Issue of Shares occurs when a public limited company raises capital by issuing new shares to the general public through either an Initial Public Offer (IPO) or Further Public Offer (FPO).
Companies can choose either fixed price or book-building methods when setting the issue price per share.
Public issues typically involve:
- Engaging merchant bankers.
- Conducting due diligence.
- Drafting a prospectus and filing it with regulatory bodies.
- Marketing the general subject to investors and allotting shares via an auction on stock exchanges.
Public issue management oversees the distribution of securities issued to the public and requires professional expertise from investment bankers, lawyers, accountants, and marketing specialists.
SEBI guidelines must be observed when issuing securities to the public, including submitting a draft prospectus for review and disclosing all pertinent details about your company, appointing a registrar of issues and merchant banker, and holding investor funds in an escrow account.
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