Introduction
Companies often require funds when up-scaling their operations and loans, VCs, and funding from investors are popular ways to get funds. However, the shares in the stock market are traded between two parties, a buyer and a seller.
So, how does a company raise money directly from the public? There are two major ways to do so, namely IPO and DPO. IPOs nowadays are going viral. But if you are unaware of DPO, you may miss many opportunities in your trading journey. So, let's discuss DPO in this blog and learn how it works.
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What is DPO?
DPO stands for Direct Public Offering, which means the company releases its securities directly to the public. DPO is also known as direct listing or direct placement. A DPO is very similar to an IPO, but these two have some major differences.
Firstly, a company comes with their IPO to list their company on a stock exchange. Conversely, a company coming up with its DPO doesn't require its public listing on a stock exchange. Due to this, a DPO becomes much cheaper than an IPO, as there is no need for the intervention of banks, brokers, dealers, and underwriters.
Moreover, the company also makes the terms and conditions for a DPO. It eliminates the need to comply with the terms and restrictions of VCs and Banks as required in an IPO.
A DPO is a preferred way for small companies to raise funds without burning a lot of capital. The sole owner of the process and its decision-making is the company itself.
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What is the process of a DPO?
Firstly, the company has to decide what type of security will be offered to the investors in exchange for the capital. The stakes can be common shares, preferred shares, debt securities, etc. Moreover, the company also decides the other factors of DPO like the offer price, minimum investment, maximum investment, the DPO period, and the settlement date.
After deciding these factors, the company prepares the paperwork to file with the SEBI for approval. Once the company receives approval, the DPO is set live on the announced date and ends on the closing date or prior if the securities get sold out before the closing date.
To Sum Up
Since DPO is not listed on a stock exchange, the securities are not traded in the NSE or BSE. Instead, the trade is done in over-the-counter markets, so the securities bought in a DPO have a low liquidity risk. Companies mostly use DPO to disburse their holding to trusted people, like employees, clients, and third-party distributors.
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