Question

Answer the following question.

Explain the two methods a company can use to make its public offer of shares.

Answer 1

Public Issue or offer means offering the shares to the public. This is the most common method used by companies. The company invites the public to subscribe for its shares by issuing a prospectus.

1. FIXED PRICE ISSUE METHOD

1. Under this method, the company states the quantity and the price at which the shares are offered to the public in the prospectus.
2. The subscribers / investors are asked to pay a certain portion of face value of shares or entire issue price along with the application.
3. The company comes to know the demand of its shares only after the subscription period ends. Company can issue shares at par or premium.
4. Fixed price method is used for all types of issues i.e. public issue, right issue, ESOS, etc.

2. BOOK BUILDING METHOD

1. Under this method, the issuer company determines the number of shares and the issue price at which its shares will be sold by bidding process.
2. The company issues a Red Herring Prospectus which contains price range or price band and asks the subscribers / investors to bid on it.
3. The lower end of the price band is called as ‘floor price’ while the highest end is called as ‘cap price’ or ‘ceiling price’.
4. The final price at which shares are offered to the investors is called as‘cut-off’ price.
5. Investors can bid any numbers of shares that they are willing to buy at any price within the price band. Bidding is kept open for 5 days. 
6. The bids along with the application money are to be submitted to the Lead Merchant Bankers called as ‘Book Runners’ who enter the bids in a book. 
7. After bidding is over, company fixes ‘cut off price’ based on the highest or best price at which all shares on offer can be sold. 
8. Company issues a prospectus which contains the final price. Book building method is used for public issues i.e. IPO and FPO

The two methods a company can use to make its public offer of shares are as follows:

(1) Initial Public Offer (IPO): An Initial Public Offer (IPO) is a process of offering shares to the general public for the first time.
A public company makes an appeal to the general public to purchase its shares by issuing the prospectus.
The prospectus contains detailed information about the company, its project, and shares. It also includes an application form free of cost.

(2) Follow on Public Offer (FPO):
Follow-on Public Offering or Follow on Public Offer is the process of offering shares to the public, after the process of IPO. In FPO, the company goes for a further issue of shares to the general public with a view to diversifying its equity base. The shares are offered for sale by the company through the prospectus.