Public Issue Types: IPO, FPO, Rights and Preferential Compared

Four routes carry securities from a company to somebody who did not hold them before. A first offer to the public, a further offer once listed, an offer to existing holders in proportion to their holding, and a placement with selected persons. The four routes differ in who may subscribe, what consents and documents each needs, and what each does to the people already on the register. Each route's requirements are read at sebi.gov.in.

Underneath those four names sits one idea, and holding it makes the whole comparison stop feeling like a list of labels. The idea is dilutionThe fall in an existing holder's proportion of a company when new securities are issued to somebody., and more precisely who carries the dilution. When new securities are created, everybody who was already there holds a smaller slice of a larger whole unless they are given a way to keep up. A rights issue hands every existing holder exactly that way. A placement with selected persons does not. A public offer brings in people who were never there at all. Every difference in consents, documents and disclosure across the four routes traces back to how exposed the people already on the register are, and that single thread is what turns four separate rulebooks into one comparison that can actually be held in mind.

All four routes belong to Indian regulation, and each has a rulebook of its own. Shareholding thresholds, approval majorities, pricing rules and timelines belong to the source requirements themselves. The source requirements are revised, so a threshold copied out of one keeps looking authoritative long after it has stopped being right. The shape of each route, the name of each consent, and the habit of opening the source on the day a number is needed all outlast a revision. The number does not.

Each of the four is defined on its own first, then compared on who may subscribe, on what it requires, and on where it leaves an existing holder.

What is an initial public offer, before it is compared to anything?

Picture a housing society of forty flats that has built four new flats on the roof and decided to sell them. In the first version of the story, the society advertises the four flats to the whole city. Anybody may apply. The people who move in are strangers to everybody in the building, and because they are strangers, the society has to put everything in writing: what the building contains, what it earns, what it owes, what the roof leak in the north wing cost last year. Nobody moving in knows any of it already.

An initial public offerA company's first offer of its securities to the public, after which the securities are admitted to trading on an exchange. (IPO) is that first version. A company that has never offered its securities to the public does so, anybody may apply, and at the end of it the securities are admitted to trading. The defining feature of a first public offer is not the amount raised but the fact that the people being invited in have no prior record of the company to read. The document that carries the offer therefore has to establish the company from nothing. Vindhya Ceramics Private Limited, invented, took exactly this route for the equity portion of its raise, and Trilokpur Capital Markets Private Limited, invented, was the merchant banker that carried it. The requirements the offer had to meet are set out by the Securities and Exchange Board of India and read at sebi.gov.in.

What is a follow-on public offer, taken on its own?

Now let the society sell four more flats two years later, after everything about the building has already been published every quarter for two years: the accounts, the repairs, the disputes, the new lift. The society still advertises to the whole city, anybody may still apply, and yet the paperwork it has to prepare is a different job. Most of what a buyer wants to know has already been said, in public, on a schedule.

A follow-on public offerA further offer of securities to the public by a company whose securities are already listed. (FPO) is a further offer to the public by a company that is already listed. The invitation is just as open as at a first offer. The public may subscribe to a first offer and to a follow-on offer alike. The separation between the two is a continuing public record that the follow-on document can stand on rather than replace. A company that has been listed has been disclosing all along, and the offer document for a further issue works on top of that record. A follow-on offer exists only for a company that is already listed. Eligibility rather than preference is doing much of the work across the four routes, and the follow-on offer is where that first shows.

What is a rights issue, taken on its own?

Third version of the same building. The society decides that the four new flats will be offered only to the forty households already living there, and offered in proportion. A household with two flats is offered twice what a household with one is offered. Nobody outside is invited. The households live there, so nobody inside has to be persuaded of anything they do not already know.

A rights issueAn offer of securities made to the existing holders of a company in proportion to what they already hold. offers securities to the people already on the register, in proportion to their existing holding. The quantity each holder is offered is that holder's entitlementThe quantity an existing holder is offered in a rights issue, worked out from what that holder already holds.. A holder can take it up, and in some circumstances can pass it to somebody else, and can also do nothing at all. A rights issue is the only one of the four routes that hands every existing holder a way to keep the proportion they had. A rights issue is therefore the natural place to start in seeing what the other three do to people. The offer reaches the holders through a document written for that purpose, and what that document must contain is set out in the requirements read at sebi.gov.in for a listed company and in company law read at mca.gov.in.

What is a preferential issue, taken on its own?

Fourth version. The society issues the four new flats to four named people, decided in advance. Perhaps they are the contractor who built the roof extension and agreed to take flats instead of cash. Perhaps they are three investors who will fund the next repair. The forty existing households are not offered anything. They are asked to consent to the arrangement, and once they have consented, the four new households arrive.

A preferential issueAn issue of securities to selected persons identified before the issue, rather than to the public or to existing holders in proportion. is an issue to persons the company identifies in advance rather than to the public or to holders in proportion. A preferential issue is an ordinary and lawful way to issue securities, used constantly and for reasons that have nothing to do with anybody behaving badly. A preferential issue is defined by two things: the recipients are named before the issue rather than found by it, and the people already on the register receive no entitlement of their own. Because of exactly that, the route carries its own consent requirements and its own record keeping, engaging company law read at mca.gov.in as well as the securities requirements read at sebi.gov.in where the company is listed.

Who may subscribe under each of the four routes?

Who may subscribe separates the four fastest, and the answer is worth setting out as a plain grid before any of the harder comparisons arrive. Two of the routes are open invitations and two are closed ones. Within the open pair, the difference is whether the company has been listed and disclosing already. Within the closed pair, the difference is whether the people invited are everybody who is already there, or a set the company picked.

Who may subscribe is the one criterion that sorts all four routes without ambiguity. The rest of the comparison hangs off that one criterion. Everything else follows: if the invitation is open to strangers, the document has to speak to strangers; if it is closed to the people already there, the consent of those people becomes the deciding requirement.

What does each route require before it can happen?

Every route runs through the same four beats in the same order. A decision inside the company, then the consent the route calls for, then a document filed where that route requires it, then the securities actually issued. Think of a household selling a share in a jointly held shop: somebody proposes it, the people with a say agree, the agreement gets written down where it can be checked, and only then does money change hands. The order is never the interesting part. The consent inside the second beat is.

The approvalThe consent that has to be obtained before an issue can proceed, which may come from the board, from the holders, or from both. a route needs is not the same across the four. A public issue and a follow-on offer engage the company's own decision making, the offer document requirements set by the Securities and Exchange Board of India, and an application to the exchange for the securities to be admitted. A rights issue engages the company's decision making and an offer document written for the existing holders. A preferential issue engages a resolution of the holders themselves, of a kind set in company law, together with a record of who received what. Which consents a route engages is fixed by the route itself. The majority behind any one of those consents is set in a rulebook that is revised, and it is read at its source on the day it is needed.

Rights Issue vs Preferential Issue: which one lets a holder keep their proportion?

The rights issue and the preferential issue are the pair most often confused, and they are also the pair where the dilution thread does the most work. Both are closed invitations. Neither goes to the public. Both can be used by a company whether or not it is listed. And on the one question that an existing holder actually cares about, they behave in opposite ways.

In a rights issue, every existing holder is offered a quantity worked out from what they already hold. Take it up and the proportion survives. The whole grew and the holding grew with it. Decline it and the proportion falls, but the fall was a choice the holder made rather than something done to them. In a preferential issue there is no such offer. The securities go to the persons the company identified, the holders already there consent to the arrangement as a body, and an individual holder who would rather not be diluted has no mechanism to prevent it. The single sharpest difference between a rights issue and a preferential issue is that one hands every existing holder an instrument for keeping their proportion and the other does not, and every difference in consent and record keeping between the two follows from that.

IPO vs Follow-On Public Offer: what does the market already know?

Both of these are open invitations to the public. Anybody may apply to either. Sorting the four routes on who may subscribe lands these two in the same box and keeps them there. A second criterion is needed to tell them apart. The second criterion is the public record standing behind the offer.

At a first public offer there is no such record. Whatever a person applying knows about the company, they know because the offer document told them. At a follow-on offer the company has been listed, has been disclosing on a continuing basis, and the market has been reading it. The disclosure burden differs between a first offer and a follow-on offer for one reason. A first offer has to establish a company that nobody has been reading about; a follow-on offer sits on top of a record the market has been receiving all along. Return to the housing society one last time: selling four flats to strangers in year one means writing everything down, and selling four more in year three means writing down what has changed. The buyer in year three can look up the rest.

Why does dilution explain the different requirements across the routes?

Put the four routes in a column and put beside each one who is exposed, and the requirements stop looking like an arbitrary heap. Where the people at risk are strangers who cannot check anything, the rulebook loads up the document. Where the people at risk are the holders already there and they are being offered a way to keep up, the rulebook makes sure the offer actually reaches each of them. Where the people at risk are the holders already there and they are being offered nothing, the rulebook asks those holders to consent and requires a record of who received what.

Requirements track exposure, so the more a route can move a person's position without giving them an instrument, the more the rulebook attaches to it. Exposure is why the four routes belong in a comparison rather than in four separate definitions stacked together. An existing holder who reads only the amount of an announced issue has therefore read the least useful thing in it.

Where does each route leave somebody who already holds shares?

Now plot one existing holder and ask a single question of each route: how much opportunity does this person have to hold their proportion? The four separate immediately, and they do not separate into two neat camps. A rights issue sits at one end because the offer comes to the holder by name and in proportion. A preferential issue sits at the other because nothing comes to the holder at all. The two public routes sit in between and are not identical to each other: at a follow-on offer an existing holder can apply in the offer like anybody else, with no entitlement and no certainty, and at a first public offer the existing holders are usually the small group already inside a company that is opening itself to strangers.

An existing holder is not diluted or protected by a route in the abstract; they are placed somewhere on a line by it, and reading a route means asking where on that line it puts them. Notice too that the middle of the line is a real place rather than a fudge. Being able to apply alongside the public is not nothing, and it is also not an entitlement, and confusing those two is how a holder ends up surprised.

What happened at Vindhya Ceramics, and what would the other routes have done?

Vindhya Ceramics Private Limited, invented, raised Rs 40,00,00,000 in total, of which Rs 25,00,00,000 was equity and Rs 15,00,00,000 was debentures. Take the equity portion and follow it. The issue was priced at Rs 100 per share. At that price Rs 25,00,00,000 became 25,00,000 shares. The applications numbered 12,400, of which 340 were rejected on verification by Suravali Registry Services Private Limited, invented, leaving 12,060 holders on the register at allotment. Across 25,00,000 shares that is a little over 200 shares each on average, and that average is arithmetic rather than an allotment rule.

Now run the counterfactual, holding everything constant that can be held constant: the same Rs 25,00,00,000, the same Rs 100 per share, and therefore the same 25,00,000 new shares in every version. Only the destination changes. Had Vindhya Ceramics offered those 25,00,000 shares to its existing holders in proportion, not one new name would have appeared, and a holder who took up their entitlement would have kept the proportion they had. Had it placed the same 25,00,000 shares with four selected investors, at Rs 6,25,00,000 and 6,25,000 shares each if split evenly, exactly four new names would have appeared and every existing holder would have been diluted with no instrument to prevent it. Identical money and an identical number of new shares produced 12,060 new holders, no new holders and four new holders. The amount raised says nothing about what a route does to the people already there, and three columns of identical inputs are the plainest available demonstration of it.

One more thing sits inside this case and it belongs to the eligibility question rather than the dilution one. Vindhya Ceramics later raised Rs 30,00,00,000 after it had listed, on a route that had not been available to it as an unlisted company at all. Nothing about the company's preferences changed on listing day. The list of routes it could stand on changed.

What actually constrains which route a company can use?

Preference is the second question about a route, never the first. Before any question of what a company would like to do, there is a question of what it is permitted to do, and that is eligibilityWhether a company satisfies the conditions for using a particular route at all, decided before any question of preference.. A follow-on public offer is by definition a further offer by a company already listed, so a company that has never listed cannot make one. The placement routes that a listed company reaches for do not exist for an unlisted one. Meanwhile a rights issue and a preferential issue are available to companies on both sides of that line, with different requirements attaching depending on which side the company is standing on.

Eligibility narrows the list before preference is ever expressed, so the honest first question about a route is not whether it suits a company but whether that company can use it at all. Deciding what to do with the list a company is left with is a commercial matter, and how a raise is priced and put together is set out under book building.

How does somebody actually use this when an issue is announced?

Three people meet these four routes in ordinary working life, and each of them uses the same distinction for a different purpose. An analyst reading an announcement asks first which route it is. The route decides what documents will exist to read and where they will be filed: an offer document at the regulator, a letter to holders, or a resolution and a record under company law. A lender looking at a borrower asks who is arriving on the register and with what. A placement with selected persons introduces named parties the lender may want to identify; a rights issue does not change the cast at all. An existing holder, including any household holding shares through a demat account, asks the question underneath all of this: is anything being offered to that holder, and by when must it be acted on.

Everything looked up next, the document, the consent and the record, follows from the route rather than from the size of the issue. Naming the route first is what makes the rest of the reading possible. Prerna Wadekar, the company secretary at Vindhya Ceramics, sits on the other side of the same distinction: her calendar after any issue is set by which route it was, not by how much it raised. None of these three decides in advance which route ought to be used. Deciding that is somebody else's job and a commercial one.

Vindhya Ceramics Private Limited, Trilokpur Capital Markets Private Limited, Suravali Registry Services Private Limited and Prerna Wadekar are invented.
Educational material. Not advice on any investment, tax, budget or market position.