Navigating the Public Issue of Shares: IPOs and FPOs

When a company needs a large amount of money to grow, it has a few options. It can borrow from banks, raise funds privately from a handful of investors, or open its doors to the entire investing public. That last route is called a public issue of shares, and it’s one of the most significant events in a company’s life. It’s how private businesses turn into publicly traded giants, and it’s also how already-listed companies raise fresh capital when they need more. This post breaks down the two main forms of public issues, Initial Public Offers (IPOs) and Further Public Offers (FPOs), and the regulatory machinery that keeps the process fair for everyone involved.

What is a public issue of shares? 🔗

A public issue is the sale of a company’s securities, typically equity shares, to the general public rather than to a select group of investors. Instead of a private handshake deal, the company issues a formal document called a prospectus that invites anyone, from large institutions to individual retail investors, to subscribe to its shares. Under the Companies Act 2013, this document is central to the entire process, since it is the primary source of information investors rely on before putting their money into a company.

Public issues fall broadly into two categories depending on where the company stands in its listing journey: an IPO for a company going public for the first time, and an FPO for a company that is already listed and wants to raise more capital.

Initial Public Offer (IPO): the first step onto the stock exchange 🔗

An Initial Public Offer is the process by which a private, unlisted company offers its shares to the public for the very first time. Once the IPO is complete, the company’s shares get listed on a stock exchange such as the BSE or NSE, and ownership shifts from a small group of founders and early investors to a much wider base of shareholders. This is often described as the company’s transition from private to public, giving it access to the broader equity market for funding.

Who regulates the IPO process? 🔗

In India, IPOs are governed primarily by the Securities and Exchange Board of India, commonly known as SEBI. The specific rulebook is the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, usually shortened to the ICDR Regulations. These regulations apply to all public issues by listed and unlisted companies and cover everything from eligibility criteria to disclosure norms and pricing mechanisms. Companies must also satisfy separate listing requirements set by the stock exchanges themselves before their shares can start trading.

How the IPO process typically unfolds 🔗

An IPO isn’t a single event, it’s a multi-stage process that usually takes several months. Here’s a simplified walkthrough:

• Appointment of intermediaries: The company hires merchant bankers (also called book running lead managers), legal counsel, and a registrar to manage the offer.
• Due diligence and draft prospectus: The merchant bankers and legal team conduct due diligence and prepare a Draft Red Herring Prospectus (DRHP), which is filed with SEBI for review.
• SEBI review and observations: SEBI examines the draft to check compliance with disclosure norms meant to help investors make informed decisions.
• Filing the Red Herring Prospectus (RHP): Once cleared, the company files the RHP, which contains almost all details except the final price, with the Registrar of Companies.
• Price band and bidding: The company announces a price band, and the issue opens for subscription. Under ICDR rules, a public issue must stay open for at least three working days but not more than ten.
• Allotment and listing: Shares are allotted proportionately across investor categories such as Qualified Institutional Buyers, Non-Institutional Investors, and Retail Individual Investors, after which the stock lists on the exchange.

Why do companies go for an IPO? 🔗

Companies choose to go public for several reasons: raising large-scale capital for expansion, giving early investors and founders an exit or liquidity route, improving the company’s public profile and credibility, and creating a currency (listed shares) that can be used for future acquisitions. The trade-off is that the company now has to answer to public shareholders and comply with ongoing disclosure obligations.

Further Public Offer (FPO): going back to the market 🔗

Once a company is listed, it doesn’t have to rely solely on debt or private placements if it needs more money later. It can launch a Further Public Offer, sometimes also called a Follow-on Public Offer, where it issues additional shares to the public. Unlike an IPO, an FPO is a subsequent or second-time issuance of shares, available only to companies that have already been through a listing.

Dilutive and non-dilutive FPOs 🔗

FPOs generally come in two forms:

• Dilutive FPO: The company issues entirely new shares. This increases the total number of outstanding shares, which reduces (dilutes) the earnings per share and the ownership percentage of existing shareholders, though it brings fresh capital into the company.
• Non-dilutive FPO: Existing large shareholders, such as promoters, sell part of their already-issued shares to the public. The total share count doesn’t change, but ownership shifts from the seller to new public investors, and the company itself may not receive any funds from this type of offer.

Why do listed companies choose an FPO? 🔗

Companies typically turn to an FPO to fund expansion plans, reduce existing debt, or diversify and broaden their shareholder base. Because the company is already listed, investors have access to its trading history, past financial performance, and market price, which generally makes an FPO feel like a lower-risk proposition than betting on an entirely unproven IPO company.

IPO versus FPO: a quick comparison 🔗

The prospectus: the backbone of every public issue 🔗

Whether it’s an IPO or an FPO, both are executed through a prospectus. Under Section 2(70) of the Companies Act 2013, a prospectus includes any document that invites the public to subscribe to or purchase a company’s securities, and this covers red herring prospectuses, shelf prospectuses, and other similar notices or circulars. Section 26 of the Act lays down what a prospectus must contain, including the company’s financial position, objects of the issue, and risk factors, so that investors have a complete and honest picture before committing money.

Red herring prospectus and book building 🔗

Most book-built public issues use a red herring prospectus, which contains nearly all the information investors need except the final price or exact number of securities. Under Section 32 of the Companies Act, this document must be filed with the Registrar of Companies at least three days before the offer opens, and any differences between it and the final prospectus have to be clearly highlighted. This structure allows the company to gauge investor demand through the bidding process before locking in a final issue price, a mechanism known as book building.

SEBI’s role in protecting investors 🔗

Public issues involve thousands, sometimes millions, of investors putting their savings into a company they may know very little about. That’s why SEBI’s oversight matters so much. The ICDR Regulations require detailed disclosures on the company’s business, financials, promoters, and use of issue proceeds, and they mandate scrutiny by SEBI before any issue can proceed. For larger IPOs, SEBI even requires that the utilisation of proceeds be monitored by a registered credit rating agency when the issue size crosses a specified threshold, ensuring the money raised is actually used for the stated purpose.

SEBI’s framework is not static either. It’s periodically updated to reflect changing market realities. In recent years, for instance, the regulator has worked on improving disclosure requirements for new-age technology companies with unconventional valuation models and on reducing the timeline between issue closure and listing, aiming for faster access to trading for allotted investors.

Why this matters beyond the exam syllabus 🔗

Understanding public issues isn’t just about memorising definitions for a Company Law paper. Every time a well-known brand “goes public,” or a listed company announces it’s raising more funds, the same legal and regulatory machinery discussed here kicks into gear: eligibility checks, prospectus disclosures, SEBI scrutiny, and investor allotment rules. Recognising the difference between an IPO and an FPO also helps you read financial news more critically, since the two carry very different risk and return profiles for investors.

What do you think? If you were evaluating two investment opportunities, one an IPO of a brand-new company and the other an FPO of a company you already track, which factors would weigh most heavily in your decision? And do you think India’s current disclosure requirements go far enough to protect small retail investors in a public issue?

References

1. https://agrudpartners.com/regulatory-framework-for-ipos-in-india/
2. https://law.asia/sebi-regulations-capital-markets-india/
3. https://www.lexology.com/library/detail.aspx?g=392270a0-547f-47be-a50c-d9df731c94cd
4. https://www.business-standard.com/amp/podcast/finance/what-is-the-difference-between-an-ipo-and-fpo-122062100075_1.html
5. https://blog.ebcwebstore.com/types-of-prospectus-companies-act/
6. https://bhattandjoshiassociates.com/sebi-icdr-regulations-2018-guide-to-raising-capital-in-indian-markets/