What are the Key Differences Between an IPO & Direct Listing

What are the Key Differences Between an IPO & Direct Listing




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A company that wishes to issue its shares to the public usually goes through the Initial Public Offering (IPO) process. Meanwhile, there’s also another concept called direct listing for companies that are already listed. As a beginner to the world of stocks, it is natural for you to get confused by these two terms. In this article, we’re going to be taking a look at both of these concepts and how they differ from each other. Let’s begin. 

Difference between an IPO and direct listing 

Many individuals think that direct listing means that a company can issue its shares directly to the public without any intermediaries or by going through the IPO process. However, that’s not true. As far as India is concerned, a company has to go through the entire IPO process to be able to have its shares listed on a stock exchange. That said, let’s take a look at the difference between an IPO and direct listing. 

Objective

The primary difference between these two concepts has to be the objective. A company that wishes to raise funds by selling its shares to the public for the first time and later have its shares listed on a stock exchange would have to go through an Initial Public Offering (IPO). 

On the other hand, a company that’s already listed in a regional or national stock exchange and wanting to list its shares in another stock exchange would have to go through the process of direct listing. For instance, let’s say that there’s a company - Company A, whose shares are listed only on the National Stock Exchange (NSE). Now, the company wishes to list its shares in the Bombay Stock Exchange (BSE) as well. In this case, it would have to opt for direct listing. 

Process

The IPO process is cumbersome, long-drawn, and can take months on end to complete. Companies wishing to go through this process would have to appoint lead managers, merchant bankers, and file a Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) for approval. Once the DRHP is approved, the company would have to market the issue and then file a final Red Herring Prospectus (RHP) specifying the opening and closing dates of the IPO. And once the IPO is closed and the public subscribes enough shares of the company, only then the shares are listed on the stock exchange. 

With direct listing, however, a company does not have to go through this entire cumbersome process to get its shares listed in an exchange seeing as it has already been listed in one after going through this extensive process. Also, the paperwork and procedure involved in getting directly listed onto another stock exchange is very minimal and shouldn’t take too much time. 

Lock-in Period 

The third major difference between an IPO and a direct listing is the presence of a lock-in period. Once a company’s shares are listed on a stock exchange for the first time through an IPO, the anchor investors and promoters are not allowed to sell their holdings immediately. A brief lock-in period is enforced, which usually lasts anywhere from 90 to 180 days. Only after the expiry of the lock-in period can company insiders be allowed to sell their holdings.

With direct listing, on the other hand, there’s no lock-in period or anything of that sort since it is merely a process for having a company’s shares listed on another stock exchange. There’s no sale of the company’s shares being made or funds being raised. 

Conclusion

With this, you must now be aware of the difference between an IPO and a direct listing. Now, if you’re planning to invest in an upcoming IPO, make sure to first have an active demat account seeing as it is a mandatory prerequisite. Without it, you will not be able to invest in the stock market. You can visit Motilal Oswal to open a demat account through a paperless process within just a few minutes. 

 

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