What is the Difference Between an Equity IPO and a Debt IPO?

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Synopsis:

Debt IPOs and equity IPOs are two of the most prominent sources of capital for companies. Owing to the nature of the underlying securities, equity IPOs, and debt IPOs have different connotations for the issuing entity. In this article, we shall discuss the meaning and workings of debt IPOs and equity IPOs and how the two differ.

Over the past few decades, the way businesses work has transformed in many ways, owed largely to the increasing application of technology and automation. One of the facets of business that has not changed, however, is the requirement for capital. Whether it is for funding existing operations or for fuelling future projects, capital is vital to any company. There is no dearth of avenues to raise capital, including public and private sources. Amongst the former, debt IPOs and equity IPOs are the go-to options for modern-day corporations.

In this article, we shall discuss

  • What is an Equity IPO
  • What is a Debt IPO
  • Equity IPO vs Debt IPO

What is an Equity IPO?

An equity IPO (Initial Public Offering) is the avenue through which a hitherto privately held company offers its shares to the public for the first time. Initiating the process of an equity IPO is a pivotal step for a company to go public and have its shares listed and openly traded on a stock exchange. When a private company invites the public to subscribe to its shares, it can opt for one of the two major types of issues, namely a fixed price issue and a book building issue.

  • Fixed price issue: In this type of equity IPO, the issuing company invites applications for its shares from the public at a fixed price.
  • Book building issue: This type of equity IPO is marked by a price range for the shares on offer instead of a fixed price. Investors can quote any price from the aforementioned price band and submit their IPO application.

After the completion of the application process for an equity IPO, share allotment is made. Subsequently, the shares of the issuing company get listed on a stock exchange where their prices are determined by the forces of market demand and supply.

What is a Debt IPO?

Another important source of raising capital for companies is a debt IPO. When companies opt for debt financing instead of equity financing, they can raise capital without having to dilute their shareholding pool. Investors can subscribe to the Non-convertible Debentures (NCDs) offered by the issuing company and enjoy a fixed interest income till the maturity of the instrument. The returns from NCDs are typically higher than conventional fixed-income instruments, making them appealing investment avenues.

There are two major types of Non-convertible Debentures, that is debentures that cannot be converted into shares in the future, namely, Secured NCDs and Unsecured NCDs.

  • Secured NCDs: This category of Non-convertible Debentures is backed by the security of the issuing company's assets. Therefore, secured NCDs are considered extremely safe investment vehicles.
  • Unsecured NCDs: This type of NCDs do not have any collateral. However, investors can be assured of a fixed rate of interest on such instruments.

Investors can apply to debt IPOs through registered stock brokers. Once the Non-convertible Debentures have been allocated, they get credited to the applicant's demat account. After the completion of the allocation process, most NCDs get listed on a stock exchange where investors can trade them at the prevailing market prices.

Key Differences Between an Equity IPO and a Debt IPO

Both debt IPOs and equity IPOs are feasible options for companies looking to raise capital from the public. While equity IPO investments often entail a degree of excitement due to the media coverage they receive and the speculation about the listing price of shares, debt IPOs are also robust investment avenues which offer fixed income to investors. Here are the major points of difference between debt IPOs and equity IPOs.

Equity IPO vs Debt IPO - at a glance

Parameter

Equity IPO

Debt IPO

Underlying asset

The underlying asset for an equity IPO is the equity shares of the issuing company.

The underlying asset for a debt IPO is the Non-convertible Debentures of the issuing company.

Cost for the company

Equity IPOs usually entail a substantial cost for the issuing company as there are several advertising costs to bear and listing requirements to adhere to.

Debt IPOs are relatively cheaper for the issuing company as compared to equity IPOs

Impact on the shareholding pool

In the wake of an equity IPO, the shareholding pool of the issuing company widens.

There is no change in the shareholding pool of the issuing company due to a debt IPO.

Returns for investors

Equity IPOs entail no fixed returns for investors. There is, however, potential for capital appreciation and dividend income.

Investors who get allocated Non-convertible Debentures in a debt IPO are eligible to receive interest income at a predetermined rate till the maturity of the instrument or their holding period (whichever is lower).

Degree of risk

Since equity investments are characterised by high risk and a potential for high returns, equity IPOs are considered to carry a high degree of risk. There is no certainty as to the listing price and future performance of the underlying stock, which makes equity IPO investment risky.

Debt instruments are generally considered to carry low to moderate risk. In the event of a company winding up, the debt obligations are settled before the equity obligations, which is why debt investment is relatively less risky. The assurance of regular income also somewhat lessens the overall risk of debt IPOs.

To sum it up

Debt IPOs and equity IPOs entail different benefits, risk, and returns for investors, which is why it is critical to understand the processes for each and the nature of the underlying securities. Before investing in a debt IPO or an equity IPO, it is advisable to carry out significant research about the issuing company and meticulously study the prospectus and other pertinent documents.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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