Initial Public Offering (IPO) & Direct Listing – Meaning & Differences

Public companies have two major ways of raising capital – IPO and Direct Listing. Both these methods have different implementation methods, and companies can choose either one that suits their financial objectives. 

As an investor, you should know the differences between both to make the right investment choices. So let’s dive deeper into it. 

What Is an IPO?

An Initial Public Offering (IPO) is a method by which private companies become a publicly traded company and open themselves to the public by offering their shares and getting listed on the stock exchange consecutively. Organisations generally hire an investment bank as an underwriter to work closely with them throughout the IPO process. 

This intermediary helps the company meet all the regulatory requirements of the Securities and Exchange Board of India (SEBI). After deciding the price of shares in the offering, the company sells them to investors via their distribution networks. Such investors comprise various investment banks, high net-worth individuals, retail investors, institutional investors, etc.

Before the IPO starts, the organisation and its underwriters organise an event in which the company’s top executives present their firm in front of investors to generate interest. Then, depending upon the assessment from this event, shares of the firm that will be made available in the IPO are priced by the underwriters.

What Are the Advantages of an IPO?

Some of the advantages of IPO are as follows:

  • For investors, it is a great way to purchase shares of companies with significant growth potential and earn from them in the long run. 
  • Allows businesses to generate capital for expanding their operations and fuel future growth. 
  • Companies get to display their credibility in front of investors and thus gain their trust. 

What Is Direct Listing?

A direct listing is a process by which businesses can sell their current shares to the general public to obtain capital or become public corporations. There is no need to hire an underwriter or promoter because the shares issued are well-known. A few crucial advantages of direct listing include that it requires fewer regulatory requirements than an IPO, does not require an underwriter, saves time, and provides fewer shares when listing than an IPO.

A direct listing allows existing private shareholders’ shares to be listed immediately on the stock market for unrestricted trading. However, with a direct offering, the listing price of the shares is not set by the underwriter. Instead, market forces control the price.

What Are the Pros of Direct Listing?

Here are some of the benefits of Direct Listing:

  • Since there is little to no requirement for an underwriter, direct listing is cost-effective. 
  • Due to the fact that it needs less regulatory formalities, the direct listing procedure is quicker than the IPO.
  • Since no extra money is being raised through the direct listing, companies are not required to pay the costs they would otherwise be required to pay in the case of a typical IPO. Therefore, in a direct listing, the charge is merely 1% instead of a 6-7% fee in the IPO.
  • Insiders and prominent shareholders like private equity, venture capital funds, and domestic high net-worth or family offices are prohibited from selling or withdrawing their investments during a lock-in period in the traditional issuance. However, the direct listing approach does not include such a situation. Shareholders aren’t required to stay in their investments for a set amount needed to keep in their investments for a set amount of time before selling them.

What Are the Differences Between IPO and Direct Listing?

The primary differences between IPO and Direct Listing have been discussed below:

AspectsIPODirect Listing
ObjectivesCreation of new sharesSelling of current share
ExpensesHigh, as it involves underwriter service feesComparatively lower as no financial intermediaries are involved
Lock-in PeriodApplicableNot Applicable
Role of UnderwritersAssistance in determining shares value, assessing demand and promotionNot Applicable
Stock PriceFixed by an intermediary based on public responseIt depends on the forces of demand and supply
LiquidityLow (involves a 180-day lock-in period for prominent shareholders like private equity, venture capital funds, and domestic high net-worth or family offices)High (investors can sell whenever they want)

Final Words

IPO and Direct Listing are the two ways privately listed companies offer their shares to the public. Although these two methods have some key differences, the end goal for both is the same. 

Frequently Asked Questions (FAQs)

Who can buy Directly Listed stocks?

In the case of a Direct Listing, you can buy the stocks once they are listed and are available for trading on the stock exchanges in a similar way as you would trade any listed stock on the exchange.  

Which companies have opted for Direct Listing?

According to BSE, companies like APL Apollo Tubes, Cigniti Technologies, Mishtann Foods, etc. are some of the companies that went for the direct listing.

What are some disadvantages of IPOs?

IPOs can be an excellent way for a company to raise capital. However, it has some cons like heavy transaction costs, chances of owners losing control over their organisation, regulatory requirements and disclosures, market pressures, etc.

What are the risks associated with Direct Listing?

Some of the risks that companies might need to face if they go for direct listing are floating stock price, risk of undervaluation, unpredictable market reaction, price volatility, etc.

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Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The article may also contain information which are the personal views/opinions of the authors. The information contained in this article is for general, educational and awareness purposes only and is not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision, whether related to investment or otherwise, taken on the basis of this article.

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