An IPO usually has a straightforward purpose – a company sells shares to investors and raises money. That cash can then be used to expand the business, repay debt or fund future plans.
The NSE IPO, however, works differently. Investors will put money into the issue. Shares will change hands. NSE will become a listed company. Yet, the exchange will not get any of the IPO proceeds.
Confused?
The reason is that NSE is not issuing new shares to raise capital. Instead, some of its existing shareholders are selling their shares to the public through an Offer for Sale (OFS). Here is how the entire transaction works and where the money actually goes. Let’s take a look –
NSE IPO is an offer for sale
The first thing investors need to remember is the difference between a fresh issue and an OFS. In a fresh issue, a company creates new equity shares and sells them to investors. The money raised comes into the company. Its share capital increases as a result.
An OFS is different. No new shares are created. Existing shareholders sell shares that they already own.
That is what is happening in the NSE IPO. According to the offer documents, the fresh issue component is not applicable. The offer comprises up to 126,436,650 existing equity shares. So, the IPO is essentially a transfer of ownership. Shares move from existing shareholders to new public investors.
Where does the IPO money go?
This essentially means that when an investor applies for NSE shares, the money paid for the allotted shares ultimately goes to the shareholders who are selling those shares. It does not become fresh capital for NSE.
The stakeholder selling shares include State Bank of India, Canada Pension Plan Investment Board, Aranda Investments (Mauritius) Pte Ltd, MS Strategic (Mauritius) and The New India Assurance Company, among others.
For example, imagine an NSE shareholder owns 1,000 shares and decides to sell 100 through the IPO. If investors buy those 100 shares, the money represents the sale proceeds for that shareholder.
NSE does not receive that amount
There is another important consequence. Since no new shares are being issued, NSE’s total equity share capital does not increase because of the IPO. The company has 2.475 billion equity shares, each with a face value of Rs 1. The same number of shares will remain outstanding after the offer.
That is the key difference between an OFS and a fresh issue.
Who bears the IPO expenses?
An OFS does not mean the selling shareholders simply receive the entire sale proceeds without costs. The expenses related to the offering are also borne by the shareholders offloading stake. These can include fees paid to merchant bankers, legal advisers and other service providers, along with book-building, printing and advertising costs.
The expenses are generally shared among the selling shareholders based on the number of shares each one offers.
NSE may initially pay certain expenses on behalf of the sellers. However, these costs are expected to be reimbursed to NSE after the successful listing.
Why is no monitoring agency needed?
Normally, when a company raises fresh money, investors want to know how that money will be used.
For example, if a company raises Rs 5,000 crore for a new factory or debt repayment, the utilisation of those funds may need to be monitored.
That question does not arise in the NSE IPO. This is because there is no fresh capital being raised for NSE.
Since the company is not receiving IPO proceeds to spend on a project, there is no fresh pool of funds requiring such monitoring. Consequently, a monitoring agency or appraising entity is not required for this purpose.
What does the NSE IPO actually achieve?
The IPO changes who owns the shares, rather than adding new capital to NSE. Existing shareholders get an opportunity to sell part of their holdings, while public investors get a route to acquire NSE shares.
For investors, this is an important distinction. The IPO paves the way for the NSE shares to trade in the secodary market.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.