An initial public offering (IPO) is when a private company offers its shares to the public for the first time to raise capital. Companies use IPOs to fund business growth, pay off debts, or cover operational costs. There are two main types: equity IPOs and debt IPOs. In an equity IPO, companies sell shares, giving investors ownership stakes. In contrast, a debt IPO involves borrowing from the public, with investors earning fixed interest as lenders. Both methods serve different purposes but ultimately help companies raise the money they need.
What are equity IPOs?
An equity IPO is when a company offers shares to the public to raise money by selling ownership stakes. Shareholders get a portion of the company's profits and voting rights in decision-making. Companies, often startups or those looking to expand, use equity IPOs to fund operations, invest in research, or acquire new assets. Private companies can go public by listing on the stock exchange, allowing people to buy and trade shares once the IPO process is complete.
There are two types of equity IPOs in the market, each differing in how the company issues the price.
- Fixed-price issue: In a fixed-price IPO issue, the company decides the price per share before the issuance.
- Book-building issue: The company sets a price range for a book-building issue, and investors must submit bids within that range. Following the bidding process, the firm determines a price based on the response, and shares are allocated according to that price.
What are debt IPOs?
In a debt IPO, companies raise money by issuing bonds or other debt instruments. Unlike equity IPOs, where investors get ownership, debt IPO investors become creditors. They receive fixed interest payments and the principal amount back at maturity. Companies use debt IPOs, like non-convertible debentures (NCDs), to fund operations, pay off debts, or support specific projects. NCDs can be secured (backed by assets) or unsecured, and they can't be converted into shares.
