Difference between direct listing & IPO

Private companies raise capital by offering their shares to the public through an exchange listing. An Initial Public Offering (IPO) is a popular way to get your company listed. However, you can also go for a direct listing. An IPO vs share’s direct listing have their differences, but both can help a company achieve its goal of raising capital. 

A company considers the pros and cons of Direct listing vs IPO  before choosing -the route. However, before understanding the difference between IPO and share’s direct listing, it is important to know what is a direct listing.

A direct listing process allows promoters to sell their shares to the public without involving intermediaries or underwriters. The BSE presently allows listed companies from other exchanges with a specific daily equity turnover to apply for.

IPO vs share’s direct listing
 

Share creation and intermediaries

In the IPO process, new shares of the company are created, which are underwritten by investment bankers.

In a direct listing, the company is not required to involve any intermediaries to sell their existing stocks.

Process

In an IPO, the company and the underwriters work closely to meet regulatory requirements, finalise investors, generate institutional investments, estimate the right stock price, and ensure a positive response to the listing. As an IDFC FIRST Bank savings or salary account holder, you can open a Demat account free of cost and apply for any IPO.

In a direct listing, in the absence of intermediaries, existing shareholders such as promoters, investors, and employees sell their shares to the public. 

Shareholder protection

IPOs take steps to ensure shareholder protection by bringing in long-term investors. Price volatility is insulated through large shareholders during the listing process.

The risks of direct listings include the absence of these aspects, apart from the fact that there is no underwriter support, promotions, or sale of shares guarantee.

Cost factor

Underwriters play an important role in IPOs and command anywhere between 3% and 7% of the share price.

A company can save on this expense by opting for a direct listing, cascading to the eventual share buyers.

Lockup period

An IPO lockup is when investors such as owners, venture capitalists and other insiders are not allowed to sell their investments in the open market. This reduces the chances of oversupply of the share immediately after the listing.

In DPO (Direct Public Offering), once existing shareholders start their sale, the shares can be freely bought or sold by institutional as well as retail investors. 

Conclusion

In comparison to IPOs, DPOs offer a less expensive alternative to share listing. What a direct listing is not offering is the listing assurances that underwriters provide in IPOs. Besides, worth noting among the direct listing vs IPO pros and cons is the lower price and volatility protection that retail investors get in direct listings.

Thus, the difference between IPO and share’s direct listing is influential in the listing decision of companies going public and the investments made by share buyers. 

Disclaimer

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