Direct Public Offering (DPO) Explained: A Simple Guide for Investors

You are buying your favourite vegetable at the market for ₹60 per kilo when you receive a call from your friend. After the initial greetings, he asks you the cost of the veggie you are about to purchase. You tell him, and upon listening, he chuckles.

When asked about the reason, he says he gets the same veggie at ₹20 per kg. How is it even possible? Your friend tells you he buys the veggies directly from the farmer, with no intermediaries. This effectively lowers the purchase price.

In finance, when companies want to raise funds without intermediaries and reduce the cost of capital-raising, they opt for a direct public offering (DPO). What is a direct public offering and its various aspects? Let us find out.

What is Direct Public Offering?

When a company wants to raise money from the public, it usually goes through a long and expensive process. Big banks and financial institutions get involved and act as intermediaries. A direct public offering skips all of this.

In a DPO, the company offers its shares directly to the public, without intermediaries. The company puts its shares on the market. Interested investors can buy them. With no intermediaries, the overall cost of raising capital comes down significantly. Generally, smaller companies that are tight on budget prefer DPOs. DPOs are also sometimes called direct listing.

How a Direct Public Offering Works?

As a DPO involves no intermediaries, the company has to do everything. Right from self-underwriting to deciding the issue terms, share price, etc., everything needs to be done by the firm going for a DPO. Here is how a DPO typically works:

• The company decides the amount it wants to raise
• It decides the type of security it wants to offer in exchange for capital. It could be common shares, preferred shares, or debt securities
• The company underwrites the issue terms, decides the offer price, minimum investment amount, lot size, and the maximum number of shares an investor can avail
• It files papers with the capital market regulator SEBI for approval
• Once it receives approval, it announces DPO dates during which investors can buy the company’s shares

Key Features of a DPO

Here are some of the key features of a DPO:

• Direct Selling of Shares

In a DPO, the company sells its shares directly to the public. With no intermediaries, the company's costs are much lower. It does not spend huge amounts on marketing or commissions.

• Less Hype

DPOs do not come with aggressive advertising. You will not see endless headlines or flashy promotions. The company lets the business speak instead.

• More Control to Founders

Because there are fewer external pressures in a DPO, founders often retain greater control. They are not forced to please short-term expectations. Decisions can stay focused on long-term goals.

Benefits of Direct Public Offering

A direct public offering offers several advantages for the company and investors. Here is how it benefits the company:

• Helps the Company Save Money

Going public the traditional way is expensive. The traditional route involves many parties, and each one takes a share of the money. A company avoids many of these costs with a DPO. There are no large underwriting fees.

No expensive roadshows across cities. No aggressive marketing budgets meant to create excitement. This helps the company save money. More importantly, more of the raised capital stays inside the business, where it belongs.

• Honest Price Discovery

Prices in a DPO are shaped by real demand and not by behind-the-scenes negotiations. The company does not depend on a few large players to decide what the shares should be worth. The market figures it out over time. This may not create instant excitement, but it lends stability.

• Can Attract Long-term Investors

Companies choosing a DPO can attract investors who actually care about the business. There is less hype. This, in turn, results in fewer short-term bets. For businesses, thinking five to ten years ahead, a long-term investor base matters.

Here is how a DPO can benefit investors:

• Everyone Gets Equal Access

In traditional public offerings, some investors get priority access over others. There is no such thing in a DPO. There are no special calls. No favours. No preferred lists. Retail investors and large investors get equal treatment.

• Clear Pricing

In a DPO, pricing is more open. There is less artificial demand created to push prices higher. This helps investors make calmer decisions rather than reacting to noise.

• Better Alignment With Business

Direct listing encourages investors to look beyond listing-day gains. Those who invest usually do so because they believe in the company’s work, not because of short-term excitement. This creates a healthier relationship between the company and its shareholders.

Risks and Limitations

While a direct public offering may look risk-free, it is not. It has certain limitations. These include:

• Not Many Investors May Notice It

Big IPOs create noise. Ads, news stories, messages from brokers. Everyone hears about them. DPOs are usually quiet. Many people may not know about them. When fewer investors show interest, buying and selling stay slow. Prices may not move much even if the company is doing well.

• Proper Homework Needed

In a DPO, you have to read about the company yourself. You need to understand how it makes money. You need to check if the numbers make sense. In a nutshell, you need to do all the homework yourself.

• Prices Can Change Quickly

In the early days of a DPO, not many investors trade in stocks offered through DPOs. Because of this, prices can suddenly jump or fall. Sometimes for no apparent reason. A single large order can move the price. This can be stressful.

DPO vs IPO: Key Differences

Though the goal of a DPO and an IPO is to raise money from the public, they differ on several aspects (see table):

Conclusion

A direct public offering is a prudent alternative for companies to raise capital without incurring huge costs. That said, as an investor, you need to do due diligence to ensure you invest in shares of those companies you understand and align with your overall financial goals.