Understanding Different Types of Public Offerings
The Indian capital market offers various types of public offerings to cater to different company sizes and investor needs. Understanding these differences is crucial for making informed investment decisions and matching your investment strategy with the right opportunities.
Mainboard IPOs
Mainboard IPOs are the most common type of public offerings, involving established companies listing on the main trading platforms of NSE and BSE.
Eligibility Criteria
- Minimum 3-year track record of operations
- Net tangible assets of at least ₹3 crores in preceding 3 years
- Net worth of at least ₹1 crore in each of the preceding 3 years
- Minimum issue size typically above ₹10 crores
Key Characteristics
- Listed on main board of NSE/BSE
- Higher liquidity post-listing
- Stricter regulatory requirements
- More comprehensive disclosures
- Larger investor base
Who Should Invest?
Mainboard IPOs are suitable for most investors, from beginners to experienced traders. They offer relatively better liquidity and information availability for research.
SME IPOs (Small and Medium Enterprise IPOs)
SME IPOs involve smaller companies listing on dedicated SME platforms - NSE Emerge and BSE SME.
Eligibility Criteria
- Post-issue paid-up capital not exceeding ₹25 crores
- Minimum application size of ₹1 lakh (approximately)
- Net worth of at least ₹1 crore as per latest audited accounts
- Positive operating profit (EBITDA) in 2 out of 3 preceding years
Key Differences from Mainboard
| Parameter | Mainboard IPO | SME IPO |
|---|---|---|
| Minimum Lot Size | ~₹15,000 | ~₹1,00,000 |
| Market Making | Optional | Mandatory for 3 years |
| Trading Lot | 1 share | Multiple shares |
| Underwriting | Optional | 100% mandatory |
| IPO Duration | 3-5 days | 3-5 days |
Risks of SME IPOs
- Lower Liquidity: Fewer buyers and sellers can make exiting difficult
- Higher Volatility: Prices can swing dramatically
- Limited Information: Less analyst coverage and research available
- Higher Entry Barrier: Minimum investment around ₹1 lakh
- Manipulation Risk: Smaller float makes manipulation easier
Who Should Invest?
SME IPOs are suitable for experienced investors who can afford higher risk, conduct thorough due diligence, and have sufficient capital for the higher minimum investment.
Follow-on Public Offer (FPO)
An FPO is when an already-listed company offers additional shares to the public. Unlike an IPO, the company is already trading on stock exchanges.
Types of FPO
Dilutive FPO
Company issues new shares, increasing total shares outstanding. This dilutes existing shareholders' ownership but brings fresh capital to the company.
Non-Dilutive FPO
Existing large shareholders (promoters, PE investors) sell their holdings. No new shares are created, so no dilution occurs.
FPO vs IPO
| Parameter | IPO | FPO |
|---|---|---|
| Company Status | Going public first time | Already listed |
| Price Reference | Price band set by merchant bankers | Market price available for reference |
| Risk Level | Higher (limited public data) | Lower (track record visible) |
| Research Available | Limited | Analyst reports available |
Why Companies Do FPOs
- Raise additional capital for expansion
- Reduce debt
- Meet minimum public shareholding requirements
- Provide exit to early investors
Offer for Sale (OFS)
OFS is a simpler mechanism for existing shareholders to sell their stakes without a full-fledged FPO. It's conducted through stock exchange bidding platforms.
Key Features
- Completed in just one trading day
- Only for companies with ₹1,000 crore+ market cap
- 15% reserved for retail investors
- Discount usually offered to retail investors (typically 5%)
OFS vs FPO
- OFS is faster (1 day vs weeks)
- OFS has no fresh issue component
- OFS is less expensive to conduct
- OFS requires less documentation
Rights Issue
While not strictly a public offering, rights issues are worth understanding. Existing shareholders get the "right" to buy additional shares at a discounted price before they're offered to others.
Key Features
- Offered to existing shareholders in proportion to holdings
- Usually at a discount to market price
- Rights can be sold if shareholder doesn't want to subscribe
- Used for raising capital without diluting existing shareholders' percentage ownership
Choosing the Right Offering Type
For Conservative Investors
Stick with mainboard IPOs and FPOs of established companies. Better liquidity and more information make these safer choices.
For Growth-Oriented Investors
Consider well-researched SME IPOs along with mainboard offerings. The higher risk can lead to higher rewards if you pick the right companies.
For Income-Seeking Investors
OFS offerings can provide entry points at discounted prices for dividend-paying stocks.
Conclusion
Each type of public offering serves different purposes and suits different investor profiles. While mainboard IPOs remain the most accessible and liquid option for retail investors, understanding the full spectrum of offerings helps you recognize opportunities that match your investment goals and risk tolerance. Always conduct thorough research regardless of the offering type, and remember that past performance doesn't guarantee future results.