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A secondary offering occurs when shares of a listed company are liquidated by a large investor or the company issues a new batch of fresh shares after an Initial Public Offering (IPO). A secondary offering can be in the form of a Qualified Institutional Placement (QIP) or a Follow-on Public Offering (FPO).
This article explains secondary offerings in detail along with their nuances, workings, impacts, and more.
Key Takeaways
- The selling of a listed business's shares on the stock market following its IPO by the business itself or by current shareholders is known as a secondary offering.
- Non-dilutive offers transfer shares that have already been issued between investors without affecting the company's capital or earnings per share.
- Fresh shares are part of dilutive offerings, also known as FPOs, which raise paid-up capital but reduce EPS for current shareholders.
- Secondary offerings increase liquidity for investors while expanding capital access to businesses.
- Investors should research the objective, pricing, and dilutive impact of an offering before investing.
What is a Secondary Offering?
The selling of a listed company's equity shares on the stock exchange following the completion of its IPO is referred to as a secondary offering. In India, there are two types of secondary offerings:
- Sale by existing shareholders: Larger shareholders of the company, like promoters and private equity investors, sell their shares to other investors after an IPO. Through an Offer for Sale (OFS) on the stock exchange, the seller receives the funds, not the firm, and no new shares are created.
- Fresh issue by the company: The business uses an FPO to raise money by issuing new shares. Such an issue arises following an IPO and requires shareholder approval.
Example of a Secondary Offering
Vodafone Idea executed India's largest-ever FPO in April 2024, surpassing Yes Bank's ₹15,000 crore FPO from 2020 by generating ₹18,000 crore with a completely fresh issue. The offer, which lasted from April 18 to 22, 2024, and was posted on the BSE and NSE on April 25, was priced between ₹10 and ₹11 per share.
This was a wholly dilutive secondary offering with no offer-for-sale component. Outstanding shares increased dramatically, and the firm received the proceeds, which were designated for 4G/5G network development and paying telecom debts.
How Does a Secondary Offering Work?
Given below is a step-by-step workflow of a secondary offering:
- Step 1: Decision to sell or raise capital
The procedure begins when the company’s board requires additional funds for debt repayment or development, or when current shareholders want to sell a portion of their holdings, frequently after their lock-in expires. - Step 2: Determining the offering structure
In addition to setting the price range and investor categories that can participate in the equity sale, the business and its merchant bankers also choose whether the offering is a fresh issue (dilutive), a sale of existing shares (non-dilutive), or a combination of the two. - Step 3: Offering and allocation
For a set number of trading days, the offer is up for bidding. Based on demand and the price discovered, shares are distributed among Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs), and Retail Investors in accordance with SEBI's stipulated quotas. - Step 4: Trading after the offering
Shares are credited to investors' demat accounts when allocation is complete, and they can start trading on the exchange alongside the company's current shares.
Types of Secondary Offering
There are different kinds of secondary offerings. Each of them is discussed here:
- Dilutive Secondary Offerings: An FPO happens when a publicly traded firm issues fresh equity shares. Even when paid-up capital and securities premium increase, ownership percentage and EPS for current shareholders decrease as outstanding shares rise. FPOs usually finance balance sheet strengthening, debt reduction, or growth.
- Non-Dilutive Secondary Offerings: Shares held by current shareholders are sold. The number of outstanding shares and ownership percentage remain constant as no new shares are issued.
- Mixed Offerings: Some offers include both fresh issue and offer for sale. It provides growth capital while allowing promoters to partially or fully liquidate their holdings.
Secondary Offering vs Primary Offering
The table below compares secondary and primary offerings:
| Parameter | Primary offering | Secondary offering |
| Meaning | Company offers its shares and lists for the first time | Sale of a listed company’s shares following the IPO |
| Nature of shares | Fresh issue | Fresh and existing issue |
| Impact on share capital | Share capital increases | Increases in the case of a dilutive offering; remains unchanged for non-dilutive |
Benefits of Secondary Offerings
Discussed here are the advantages of secondary offerings:
Benefits to investors
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Liquidity: Secondary offerings allow investors to sell their holdings after an IPO.
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Potential discount: Offerings, particularly FPOs, are sometimes priced below the going rate in the market, allowing investors to participate at a lower cost.
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Greater access: An already-listed firm with reported financials gives more investors, including retail players, the opportunity to invest.
For the company
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Access to new capital: An FPO enables a publicly traded firm to raise fresh funds for debt repayment or expansion without taking on additional debt.
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Increased investor base: It increases the investor base, resulting in greater liquidity.
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Funding competitiveness: The existence of a secondary market makes early-stage businesses viable for private investors.
Risks of Secondary Offering
There are key limits to secondary offerings, as discussed below:
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EPS dilution: A dilutive offering reduces each shareholder's proportionate claim to earnings and voting rights by increasing the number of outstanding shares.
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Price volatility: As the market absorbs the additional supply, prices frequently respond, sometimes drastically, to the announcement and pricing.
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Negative signalling: Even when the cause is unrelated, such as rebalancing, a sizable non-dilutive sell by promoters may be seen as a lack of confidence.
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Uncertain demand: As seen by several previous Indian FPOs, a weak retail subscription may put pressure on the stock price after listing.
What Should Investors Analyse Before Investing in Secondary Offering?
Discussed below are factors that investors must consider before investing in a secondary offering:
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Goal: Investors must question the purpose of the secondary offering, meaning how the proceeds are supposed to be used.
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Pricing: To determine the discount, compare the offer price to the market price.
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Dilution impact: Calculate how your ownership and EPS will be impacted by an increase in outstanding shares in a dilutive offering.
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Who is selling: In a non-dilutive offering, find out whether big institutions or promoters are leaving since insider selling may indicate a decline in confidence.
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Does a secondary offering always dilute my ownership? Examine the company's debt load, growth prospects, and financial standing separately from the offer price.
Bottomline
A secondary offering, whether dilutive or non-dilutive, is merely the evolution of a listed company's ownership pattern or shares following its IPO. In a dilutive offering, the corporation receives new capital, but current shareholders see their ownership and EPS diminished; in a non-dilutive offering, nothing changes at the corporate level. Neither is intrinsically good or bad; what counts are the motivation, the cost, and the core principles of the business. Investors are better positioned to determine if it is worthwhile to participate if they look past the headline figure.
