IPO vs Direct Listing – Compare Concept, Workings, Benefits & more

For many beginners and aspiring investors, IPO and Direct listing have always been a matter of discrepancy.

For that reason, here we will discuss everything about IPOs vs Direct Listing to outline the specialty of each.

India is witnessing a dramatic surge in the number of startups and private companies.

There’s no surprise that opportunities are on the rise. Mainly for aspiring investors who are actively waiting for startups and companies to go public.

To simply put, investors look for the new companies that are issuing its shares to the general public via the stock market.

Most investors may find it a golden opportunity for investment as they anticipate that they are becoming shareholders of a new company of which the share prices are likely to skyrocket in the future.

But why companies go public? The answer is very obvious. It is all about the game of collecting funds.

Companies want to go public to raise the capital funding for their businesses, for which they predominantly opt IPO and Direct Listing methods.

IPO vs Direct Listing – Overview Comparison

Here is the comparison of IPO & Direct Listing definition & overview –

Know about IPO

An IPO (Initial Public Offering) is a well-structured route for private firms. These firms may aspire to boost liquidity in their businesses by going public and get the name registered in the stock market.

This indicates the most prominent benefit to a company. After entering the stock market, the company can pile up capital funding as much as they wish for their businesses.

With the help of underwriters, the company may create new shares to be issued to the investors in the stock market. Throughout the process, underwriters (investment banks) play a critical role.

They may be the first party to decide the share prices of the issuing company. Similarly, they may also issue shares via their own distribution networks in the further phases.

Even though the benefits of IPO are highly considerable, still, many companies don’t find it an attractive option. High fees and further added costs might be a reason here.

Know about Direct Listing

Direct Listing Process (DLP) or Direct Public Offering (DPO) is another most popular alternative after IPO. However, the definition and objectives of DLP may vary compared to Initial Public Offering.

A Direct listing is unlike the IPO process. As the name sounds, it is a direct way by which a new company issues and sells its shares to the general public.

The term Direct indicates that no intermediaries are included in the Direct listing process.

That’s how Direct listing becomes a cheaper alternative as no added fees and charges become the reason for a hitch for a company. Still, the method may have its own underlying limitations.

Companies tend to sell out their existing shares in the Direct listing process. In contrast, in IPO, companies issue and sell their new shares only.

Also, the Direct listing may come with higher initial volatility concerns.

At the same time, since no intermediary is included in the process, balancing the prices often turns out challenging.

No promotions, no defense by the shareholder, and no guaranteed investors for the long term point out further drawbacks of DPO.

This is a major thing to consider while checking out IPO vs Direct Listing.

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Compare IPO & Direct Listing Workings

Here is the detailed comparison of IPO vs Direct Listings working process –

How does an IPO work?

We can’t deny that IPO is a well-structured framework by which privately-owned companies, for the first time step into the stock market.

But while covering this IPO journey, the following important things are checked. These include-

Investment bank (also known as an underwriter) – Companies approach investment banks to get their name listed in the stock market.

While selecting the bank, companies first configure the authenticity and reliability of such banks.

Due Diligence and Regulatory Fillings – On this step, the investment bank turns a broker. Similarly, they start playing a critical role between the company and investors.

Meanwhile, companies ensure they meet the documentation requirements. They may even have to consent with further agreements as a part of due diligence process.

Pricing – After fulfilling the conditions, companies will then set the offer prices for their shares with the help of underwriters.

Before, companies should receive an approval letter from the SEBI. Approved companies then receive the chance to market their shares and take part in roadshows.

Transition to the Market Competition – In the last step, the underwriter or investment bank evaluates the issuing company’s share performance.

Similarly, they act as advisors to the company and point out all the potential moves that give gainful signs.

How does a Direct Listing Work?

The Direct listing had no existence in the financial market before 1976. After 1989, the process gained enormous traction in the market.

The program is vital to small firms and businesses with short capital needs. The program eliminates the needs of the investment bank that makes it affordable.

That makes a good reason why it is interesting to know more about the Direct listing and the way it works –

Preparation – As the name sounds, a Direct listing is an instant method for a company to pile up funds for their businesses.

That’s why it hardly takes less than a month for a company to complete the whole process.

Since no intermediary is involved in the DPO, that’s why the company itself is liable for discrepancies.

Before selling the offerings, companies settle on that no documentation flaw, which becomes a problem later.

Compliance Filling – The prepared document compilation consisting of specimen security, offering documents, attorney opinions, etc., is then sent to the securities regulators.

These offerings can be sent in any state or region where the company wishes to offer its shares.

Selling the Offering – In the end, regulators approve the company. This states that a company can now proceed with a quick sale process.

However, regulators may review the company’s application yearly.

In both IPO and DPO, companies pass through eligibility criteria. During the process, they may even get disapproval from the regulators due to several reasons.

IPO vs Direct Listing – Conclusion

In a nutshell, the role of an investment bank reflects the major difference between IPO and Direct listing, or IPO vs Direct Listing. IPO method may entail the long-term vision of a company.

In contrast, the Direct listing method is quite a friendly alternative to small companies with less capital requirements.

But amid this, IPO companies seem to be a reliable option for investors. This is because of underwriters.

In the further process, they act as an advisor to the issuing company. They guide them about the numerous areas of pros and cons of issuing its shares.

They may even support the company by inviting more investors to invest in its shares, which lifts its demand.

There’s no surprise that this leads to a green signal for investors as demands directly impact the share prices.

On the other hand, the company opts for the Direct listing to better deal with its urgent business needs. Investors may anticipate higher returns at such events, but the investment can be risky.

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