While you may have heard about private companies going public by launching their IPOs (Initial Public Offering), companies can also opt for a direct listing via a DPO (Direct Public Offering). Both are instruments with which firms can raise funds from the public, but they have their differences. While the first involves much effort and time, the second takes a shorter route to raise funds.
What Is a DPO?
Direct Public Offering is a process by which a private organisation becomes available for the public to invest directly without the help of any intermediaries. The role and cost of investment bankers, underwriters, and brokers are all eliminated through this process.
As a result, the issuer company gets to decide on the terms of its issue, including the offer price, offer period, the minimum permissible investment per investor, bid-ask spread, settlement dates, etc. Due to this simplicity, preparation for DPOs takes only a few days to a few months.
This process is best suited for small to mid-sized companies, which want to avoid all the extra costs involved in an IPO and want to raise funds through the public.
How Are DPOs Issued?
An issuer of a DPO publishes an offering memorandum before launching it. Details of an issuer are described in the offering memorandum, along with its performance history. It also describes the kind of security that will be offered. The mechanism of publicising the offering memorandum is then decided by the company. The offering memorandum is distributed through Telemarketing, social media platforms, newspaper advertisements, and public meetings with the existing shareholders.
The issuer is responsible for making sure that the offering memorandum complies with all guidelines established by the relevant regulating authority. This includes the market regulator SEBI (Securities and Exchange Board of India) and the respective stock exchange. The issuer must provide compliance documentation to SEBI before launching its DPO.
SEBI will examine a company’s financial stability, compliance with applicable regulations, and other factors when it presents the necessary documentation. If the issuer and its offering are deemed suitable for public disclosure, SEBI may approve the DPO.
On SEBI’s approval, the company will distribute copies of the offering memorandum, and then its issue will become open for sale. DPO has a maximum and minimum number of shares. If the minimum number of shares is not sold, then the issue gets cancelled. In that case, investors will get a full refund of their funds.
The demand for shares may also exceed the maximum limit of shares issued. In that case, the issuer will give out shares on a first-come-first-serve or pro-rata basis.
What Are the Differences between DPOs & IPOs?
There are many differences between IPOs and DPOs regarding processes, objectives, and effects. These are listed as follows:
- Role of Underwriters
The process of IPO requires the major involvement of underwriters, who draft the IPO prospectus and also invite potential investors. The hiring of underwriters carries with it a hefty fee to be borne by a company going public through an IPO. Underwriters may guarantee the sale of a specified number of securities in an IPO.
The process of DPO eliminates the role of underwriters which saves large expenses for the issuer. Many small private companies choose DPOs as they cannot afford to pay massive fees levied by investment banks, and underwriters.
- Difference of Purpose
The purpose of an IPO is to offer new shares to the public and raise funds from them. On the other hand, the process of DPO does not involve offering new shares to investors, but it deals in selling existing shares among investors.
- Time Involved
Since there are multiple steps involved in IPO including hiring an underwriter or investment banker, registration for an IPO, Verification of disclosures in application by regulator, application to stock exchanges, creating buzz by roadshows, pricing of an IPO and allotment of shares, etc. , the process of IPO becomes long drawn. In the case of a DPO, many of the above processes are not required including dependency on underwriters or investment bankers, and thus it takes a lesser amount of time.
- Easy-to-Understand Business Models
For an IPO, with the involvement of underwriters, it gets easier to sell the shares even though a company has a complex business model.
In DPO, the companies sell their shares directly to their shareholders. The business organisation needs to have an easy-to-understand business model and a high amount of goodwill among its existing customers to draw them to invest.
- Lock-up period
IPOs come with a lock-up period where certain investors, including venture capitalists, promoters, and insiders, cannot sell their investments. But DPOs do not come with such requirements.
What Are the Pros and Cons of DPO?
Let us compare the advantages and disadvantages of a DPO:
DPOs offer several advantages to the issuer company. The existing shareholders can sell off their shares at a price that they find acceptable. Moreover, the DPO process involves a lesser amount of time and money. Since this process does not give away more shares to new investors but deals only in existing shares, the company promoters can avoid the risks of losing ownership.
With the elimination of underwriters, a private organisation may have to do a lot of tedious work on its own. The absence of underwriters can also affect the sale of its shares as the public may not find the offer attractive. Companies can also end up raising considerably lesser funds from DPOs.While, IPO shares are listed on the stock exchange (s) and may be traded through a platform. However, shares allotted in a DPO are traded in the OTC market. Thus, the trading of DPO shares may not be as liquid as IPO shares
DPO is a direct listing process, which is less expensive and complicated than traditional IPOs, which is why many small and mid-sized companies prefer DPOs. Generally, DPOs work well for companies with a strong brand image as it does not involve extensive marketing.
Frequently Asked Questions
Who benefits from a DPO?
Small organisations that want to avoid the cost of hiring underwriters, and other IPO process related charges, benefit from DPOs. The organisation needs to have a strong customer and investor base to benefit from DPO transactions.
Why did Spotify avail DPO?
Spotify opted for DPO as it is an already established brand with high liquidity. So it does not have to worry about finding investors to sell its shares.
How can a company get listed without an IPO?
DPO is another process through which a company can choose to go public without choosing an IPO.
What type of company will want to apply for a DPO?
DPOs are ideal for companies that want to go public but do not have the resources to do so. Moreover, companies that do not want to dilute shareholders’ equity can opt for a DPO. If the promoter or existing shareholders want to avoid lock-in periods, DPOs are also preferred.
Krishna is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.E. (Hons) in Computer Science Engineering from BITS Pilani and MBA (Finance) from JBIMS, Mumbai. He is currently working as Investments Principal at Wint Wealth. Previously he worked at Kotak Mahindra Bank at their DCM desk and Northern Arc Capital at their Structured Finance desk.