Welcome to the exciting world of post-IPO funding. Just like a company setting sail on its journey, we must navigate the waters of raising capital after going public. 

When a young company needs more funds, after possibly exhausting the options of angel investors, venture capitalists and private equity funds, it moves to capital from the public. That’s where an Initial Public Offering (IPO) comes in. 

As a company enters public markets, it seeks funds for expansion, debt reduction, or strategic moves like acquiring other companies. The quest for post-IPO capital is as thrilling as an adventure on the higher opportunities. 

However, after an IPO, how can a publicly listed company raise more funds? What are the options available?

As we will learn through this blog, there are a variety of different types of post-IPO funding options available to the company.  

Post-IPO Funding Options: Other Sources 

Publicly listed companies can raise more funds through avenues like follow-on public offerings (FPOs), rights issues, qualified institutions placements (QIP), private placements, warrants, etc. 

This is done under a few key scenarios. 

Strategic Growth Initiatives 

  • Funding Specific Projects or Acquisitions: If a significant opportunity arises for expansion, like a new product line or a strategic acquisition
  • Scaling Operations: As the company grows, its working capital needs for raw materials, payroll, and infrastructure investment also increase

Financial Maneuvering 

  • Debt Repayment or Restructuring: If the company has significant pre-IPO debt, it needs to generate funds to refinance it at potentially more favourable terms due to the improved public image post-IPO. 

Market Conditions 

  • Favorable Investor Sentiment: A strong stock price and positive market outlook can create an ideal window to raise more capital. Investors may be more receptive to buying new shares if the company’s future looks bright. 
  • Need to Maintain Cash Reserves: During economic downturns, companies may prioritize raising additional capital to build a cash buffer. 

Companies need to decide in their Board meetings the option they need to go for, to raise capital. As mentioned above, there are multiple options, and each one has their own characteristics. In all the options, there are new shares which are created.

There is nothing like a perfect option and there are Advantages and Disadvantages for each one of them. The company going for the capital raise, needs to see its financial health, stock market perception, objectives, the time they have in hand to complete the process, the kind of investors they need to reach out to, etc.

Let’s look at this in detail.

  1. Follow-on Public Offer (FPO)
    1. Characteristic: This is similar to an IPO, thereby the name Follow-on Public Offer. They are offered in the similar way to QIPs, Retail investors and HNI investors in the same proportion as an IPO, i.e., 50%, 35% and 15% respectively. The process also has an anchor investor day before the FPO window opens. Similar to IPO, the FPO window is of minimum 3 trading days.
    2. Pricing: The company announces a price band a few days before the FPO window opens. The pricing is decided by the company and is generally a discount to the prevailing market price.
    3. Advantages
      1. It opens avenues for all investors to a chance to lap up company’s shares at discounted prices compared to the current market prices.
      2. The shareholder base of the company increases
    4. Disadvantages:
      1. Lengthy process, similar to IPO
      2. Cost of doing an FPO is higher, as compared to other options
      3. If the discount offered is high as compared to current market prices, there is a heavy selling by existing shareholders, who may want to repurchase in FPO. However, if the FPO is oversubscribed, the prospective investors might not get allocation.
      4. Dilutes the ownership, as new shares are created
  1. Qualified Institutions Placement (QIP)
    1. Characteristic: New shares are sold to a select group of qualified institutional investors in a private placement. As the name suggests, QIP is not offered to retail and HNI investors.
    2. Pricing: The shares are offered to QIPs at a price which is set by SEBI’s prescribed formula. The company can offer a maximum of 5% discount to this floor price.
    3. Advantages:
      1. Fastest process, as it entails lesser disclosures and documentation
      2. Cheaper as compared to other options
      3. Discretionary allocation, hence the company management has an option to choose its shareholders whom they want to offer, in case of an oversubscription. Hence, they can choose institutional investors which a long term holding perspective
      4. Not a lot of impact on the current market price of the company’s share
    4. Disadvantages:
      1. Retail and HNI investors miss participating, hence limited investor base
      2. Pricing not in hands of the company (this is actually good for current market price)
  1. Rights Issue
    1. Characteristic: Rights issue is offered to the existing shareholders of the company. This is in a way to reward the existing shareholder.
    2. Pricing: The issue is offered at a much higher discount as compared to the current market price, and the eligibility of existing shareholders is in some proportion to their current shareholding. For example, the company may decide to give a 40% discount to the current price, in a ratio, say, 1:5, meaning 1 rights to every 5 shares held.
    3. Advantages:
      1. No dilution of shareholding (unless shareholder renounces their right to entitlement)
      2. Faster and cheaper
      3. Shareholders get an option to apply for exercising their rights, and they may renounce as well. In case of letter, they can sell their entitlement on the exchange for some proceeds
    4. Disadvantages:
      1. Not open for anyone outside existing shareholders (unless someone buys entitlement from secondary market, if available)
      2. Massive discount to be given to lure additional investments by existing shareholders
  1. Preferential Issue Allotment
    1. Characteristic: New shares are sold to a limited group of chosen investors in a private transaction. It is a pivotal tool for companies seeking targeted capital infusion.
    2. Pricing: Similar to QIP, the pricing of Preferential Issue is governed by SEBI’s prescribed formula. Generally, the issue is done at a premium to current market price.
    3. Advantages:
      1. Quick process as investor(s) are already pre-decided and selected by company
      2. Cheapest process
      3. Generally, the investor has a long term strategic interest in the company, or may be a promoter related entity
    4. Disadvantages:
      1. Equity dilution of all existing shareholders
      2. Existing shareholders’ approval is needed (through General Meeting or Postal Ballot, etc) which might elongate the process a bit. Post approval, it hardly takes any time though
      3. The market might perceive this route as a sign that the company is unable to raise funds through more traditional means
      4. Preferential allotment to insiders or related parties can lead to conflicts of interest

Conclusion  

Choosing post-IPO funding options helps in funding innovation, drives growth, and builds a shared path to success for companies and investors. Understanding the various post-IPO funding options, from follow-on offerings to qualified institutional placements empowers companies to make informed decisions about their capital needs.