IPO vs. DPO: A Comparative Analysis of Capital-Raising Methods

What is DPO and How is it different from IPO?

When companies seek to secure funds to address their financial requirements, they typically have two primary avenues to explore: debt and equity. In cases where a company has already amassed a significant amount of capital through debt and decides to procure additional funds by offering shares, there are two major approaches to consider: Direct Public Offering (DPO) and Initial Public Offering (IPO). While both DPO and IPO serve the fundamental purpose of raising additional capital, they diverge in several crucial aspects. In this blog post, we will delve deeper into DPO and IPO, and by the end, you will gain a comprehensive understanding of how these two methods compare and contrast.

Direct Public Offering – DPO meaning

Direct Public Offering (DPO), as the name suggests, involves companies raising capital by directly selling their existing shares to investors without creating new shares to sell. In a DPO, there is no intermediary such as investment banks, underwriters, or broker-dealers involved in the process. Instead, the company directly offers its shares to the public.

DPOs are often favored by smaller-sized companies because they can help reduce the costs associated with raising capital. By bypassing intermediaries, these companies can potentially save on underwriting fees and other expenses typically associated with traditional IPOs. DPOs provide a more straightforward and cost-effective way for companies to access public capital markets and raise funds from investors.

How does a DPO work?

Indeed, companies may opt for a Direct Public Offering (DPO) instead of an Initial Public Offering (IPO) to raise capital, particularly when they have limited financial resources to pay intermediaries such as investment banks and underwriters. In a DPO, the company’s shares are sold directly to the public without the involvement of these intermediaries.

One of the key advantages of a DPO is that companies have greater flexibility and control over the terms of the offering. They can tailor the offering to align with their specific goals and needs. This includes deciding the offering price, setting limits on the maximum number of shares investors can purchase, and determining the timeline of the offering. This flexibility allows companies to have a more customized approach to their capital-raising efforts, which can be especially beneficial for smaller or closely-held businesses.

Advantages and disadvantages of DPO

Advantages of DPO:

1. Liquidity for Shareholders: DPOs provide existing shareholders with liquidity, allowing them to sell their shares in the open market. This liquidity can be attractive to early investors and employees who may want to monetize their holdings.
2. Reduced Costs: DPOs can be cost-effective because they bypass intermediaries such as investment banks and underwriters. This can result in lower underwriting fees and other expenses associated with traditional IPOs.
3. Efficiency: The process of raising capital through a DPO is often less time-consuming than a traditional IPO. There may be fewer regulatory requirements and less complex paperwork involved.
4. Confidentiality: DPOs may allow companies to maintain greater control over the information they disclose. Unlike in an IPO, where extensive disclosures are required, DPOs may provide more confidentiality regarding a company’s financials and business strategies.

Disadvantages of DPO:

1. Limited Fundraising Amount: Companies raising capital through a DPO are subject to regulatory limits on the amount of funds they can raise within a 12-month period. This limitation can be a drawback if a company requires a substantial infusion of capital.
2. Potential Volatility: DPOs can be more volatile than initial offerings because the shares are sold directly to the public without the price stabilization mechanisms often employed in IPOs. This can result in greater price fluctuations.

It’s important for companies to carefully weigh these advantages and disadvantages when deciding between a DPO and an IPO. The choice depends on their specific financial needs, shareholder considerations, and their willingness to navigate regulatory requirements and market dynamics.

IPO vs. DPO: How they different. Let’s further detail these distinctions:

1. Purpose/Focus:

• IPO: The primary purpose of an IPO is to raise additional capital for the company by issuing new shares to the public.
• DPO: In a DPO, the focus is not on raising additional capital but rather on increasing existing shareholders’ liquidity and providing them with easier access to the public market.

2. Cost Involved:

• IPO: IPOs typically involve higher costs as they require the services of intermediaries such as investment banks, underwriters, and legal advisors.
• DPO: DPOs have lower costs because they do not involve intermediaries. Companies can directly sell shares to the public without paying underwriting fees.

3. Volatility:

• IPO: Traditional IPOs tend to have lower volatility because the share prices are typically negotiated and set before listing.
• DPO: DPOs can have higher volatility because the company has the freedom to set the price of offerings, leading to potentially larger price fluctuations.

4. Suitability:

• IPO: Companies considering an IPO may not need a well-established customer reputation, as the focus is on raising capital. Investors may be more interested in the company’s financials and growth potential.
• DPO: DPOs are more suitable for companies with a good reputation among customers and a transparent and easily understandable business model. Investors need to be convinced of the company’s value and how it generates revenue.

5. Lock-Up Period:

• IPO: In a traditional IPO, there is often a lock-up period during which existing shareholders are prohibited from selling their shares in the market. This is done to prevent oversupply and potential price declines.
• DPO: DPOs do not typically involve lock-up periods because only existing shareholders sell their shares directly in the open market.

6. Timeline of the Process:

• IPO: IPOs are usually a time-consuming process that can take a year or more to complete. This includes preparing the management team, conducting due diligence, underwriting, and regulatory compliance.
• DPO: DPOs are generally less time-consuming since there are fewer obligations and intermediaries involved. Companies can proceed at a pace that suits their needs.

These differences highlight the various considerations and trade-offs that companies must assess when deciding between a DPO and an IPO as a method to access the public capital markets and meet their financial objectives.

Companies that may consider a Direct Public Offering (DPO) include:

1. Smaller Companies: DPOs are often chosen by smaller companies that want to go public but may not have the financial resources to undertake a traditional IPO.
2. Preserving Equity: Companies that want to raise capital without diluting existing shareholders’ equity may opt for a DPO since it allows them to sell existing shares to the public.
3. Avoiding Lock-In Periods: In a DPO, there are typically no lock-up periods for existing shareholders, so those who want to avoid restrictions on selling their shares might prefer this method.
4. Transparency: Companies with a transparent and easily understandable business model may find DPOs suitable, as investors need to understand how the company generates revenue and its value proposition.
5. Cost-Efficiency: DPOs can be a cost-effective way to access public capital markets because they eliminate the need for intermediaries like investment banks and underwriters.
6. Control: Companies that want more control over the offering price, terms, and the overall process may find DPOs appealing.

It’s important for companies to carefully assess their financial situation, goals, and the regulatory requirements in their jurisdiction when deciding whether a DPO is the right path to going public. Each company’s circumstances are unique, and the choice between a DPO and an IPO should align with its specific objectives.

Is direct listing considered better than IPO?

Whether a DPO or IPO is better depends on the company’s specific goals and needs. DPOs can be cost-effective and faster, but they come with their own set of risks, such as potential price volatility and lack of underwriting support.

Can a company get listed without an IPO?

Yes, a company can get listed without an IPO through a direct listing, where existing shares are offered to the public.

Who sets the price in the direct listing?

In a direct listing, the issuer (the company) sets the price of the offerings, along with other terms such as the maximum number of shares investors can purchase and the timeline of the offering.

Is direct listing common in India?

Yes, direct listings are allowed in India under the Companies (Amendment) Bill, 2020.

How long does a direct listing take?

A direct listing (DPO) process is generally faster than an IPO and can typically be completed in about a month or so, depending on the specific circumstances and regulatory requirements.