Key Differences Between IPO & Direct Listing

The process of issuing shares to the public is known as an Initial Public Offering (IPO). Meanwhile, listed corporations can take advantage of something called direct listing. As a newcomer to the world of stocks, you understandably find these two terms confusing. This article will examine the similarities and differences between these two ideas. OK, let's get started. 

Difference between an IPO and direct listing 

Direct listing is sometimes misunderstood by the public to indicate that a firm can issue shares to the public without going through an initial public offering (IPO). That, however, is not the case. In India, a company's stock must go through the full IPO procedure before it can be listed on a stock exchange. Accordingly, let's compare an initial public offering with a direct listing. 

Objective

The ultimate goal of each of these ideas is what differentiates them from one another. An Initial Public Offering (IPO) is the process a company goes through when it wants to offer shares to the public for the first time and then get those shares listed on a stock market to raise capital. 

To list shares on another stock exchange, however, a company must first go through direct listing if it is already listed on a regional or national stock exchange. Consider Company A, whose stock is traded exclusively on India's National Stock Exchange (NSE). Company officials have recently expressed interest in listing BSE shares. It would have to go the direct listing route in this scenario. 

Process

The initial public offering (IPO) procedure is protracted, burdensome, and can take months to complete. In addition to seeking approval from the Securities and Exchange Board of India (SEBI), organizations desiring to proceed with this procedure would be required to designate merchant bankers and lead managers and submit a Draft Red Herring Prospectus (DRHP). After the DRHP has been approved, the organization would be required to submit a final Red Herring Prospectus (RHP) that details the opening and closing dates of the initial public offering (IPO) and market the issue. The shares will not be listed on the stock exchange until the initial public offering (IPO) concludes and a sufficient number of public subscribers have purchased them. 

Direct listing, on the other hand, obviates the need for a company to endure this arduous procedure once more in order to have its shares listed on an exchange, since the company itself has been listed on one prior to undergoing this comprehensive procedure. Additionally, the documentation and process associated with obtaining direct listing on an alternative stock exchange are negligible and should not consume an excessive amount of time. 

Also read :- What is Oversubscription In IPO

Lock-in Period 

The existence of a lock-in period is the third significant distinction between an IPO and a direct listing. Anchor investors and promoters are prohibited from quickly divesting their holdings following the initial listing of a company's shares on a stock exchange via an IPO. A mandatory temporary suspension is in effect, typically spanning from ninety to eighty days. Permission for company personnel to divest their holdings is contingent upon the lock-in period having expired.

In contrast, there is no lock-in period or similar provision associated with direct listing, as it solely entails the procedure for listing a company's shares on an alternative stock exchange. There is an absence of share sales or fundraising activities pertaining to the organization. 

Conclusion

You should now understand the distinction between an initial public offering (IPO) and a direct listing. Now, in order to invest in an impending IPO, you are required to have an active demat account, so ensure that you have one. You will be incapable of investing in the stock market in its absence. A few minutes later, you can visit Paytm to establish a demat account via a paperless procedure.