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What is Secondary Offering?

9 Mins 18 Nov 2021 0 COMMENT 1 LIKE

Introduction:

A secondary sale of shares does not involve the company. It is between existing and new investors of the company. The money from the sale.

What is Secondary Offering?

Once a company gets listed on the stock exchange, the trading of already issued shares starts in the stock exchange (secondary market). That is known as a secondary offering.

Let's take a closer look at the Primary and Secondary Market Concepts:

There is a marked difference between primary and secondary offerings. For the former, the company issues new shares to the public. It is a direct interaction between the issuing company and the investors. Whereas, for the later, the trade happens amongst the investors. The issuing company is not involved.

The below diagram will depict the scenario:

The primary offering is a direct dealing between the company and the investors in exchange for cash. The proceeds thus obtained from such an offering are used to fund the business, make acquisitions, and general corporate purposes.

In the secondary market transaction, neither the company issues any new shares nor receives any additional capital. The entire transaction remains limited amongst investors: the buyers, the sellers, the brokerage houses listed in the stock exchange.

Therefore, it can be said that the primary market is the new issue market; and the secondary market is the aftermarket.

Example of Secondary Offering:

Suppose Mr A buys about 50% of outstanding shares from the Company XYZ during its IPO process. And then, after the company gets enlisted to the Stock Exchange, he sells 25% of his subscription later. When Mr A initially subscribed to the XYZ Company's shares directly during the IPO process, it exemplifies the primary market transaction. But at a later date, when he sells 25% of his subscription at the secondary market (through a brokerage house registered with the stock exchange), it exemplifies the secondary market transaction or secondary offering.

There is a Distinction between Secondary Offering and Follow on Offering:

Not all the offerings, other than IPOs, are secondary offerings. The issuing company may further return to the capital market with a follow-on offering for any further capital needs. The follow on offer is also known as a seasoned equity offering.

The distinction can be summarized in the following way:

Each time the issuing company returns to the primary capital market with a new offering after debuting with IPO, it is counted as Follow On Offering. The business always receives capital each time it enters the primary capital market. However, in the secondary offerings, the issuing company is nowhere involved; and therefore, it doesn't receive capital in any form.

Secondary Offering Features and Functionalities:

Imparts Liquidity:

The most crucial feature of the secondary offering is: it imparts liquidity. Liquidity means immediate conversion of securities into cash. The stock market provides a ready market for the sale and purchase of securities. It comes as an assurance for the investors for the ready conversion of their deposits into cash. Moreover, switching possibilities amongst extended / medium / and short term investment provisions are also available.

Attracts New Investors:

A secondary offering is expected to leave some value for new investors on the table. That means the purpose of the secondary offering is for existing investors to cash out from private investment. Usually, existing owners of the company only sell a partial stake. The secondary offering helps determine the market value of the company. Stock exchanges encourage people to invest by regulating the new issue process, thereby enforcing better trading practices and educating the public about investment.

Acts as an Economic Barometer:

The secondary marketplace, the Stock Exchange, acts as the economy's pulse, or better to say: a reliable barometer for a country's economic condition. Every significant change in the nation's economy gets reflected in the stock prices. The continuous disinvestment and reinvestment procedure helps invest in the most productive investment proposal, leading to capital formation & economic growth.

Influences the Pricing of Securities: Demand and supply factors play a vital role. The shares of profitable and growth-oriented companies value high because of their high demand. The valuation of securities is helpful for investors, Government, and creditors. The investors can know the value of their investment, the creditors can value the company's creditworthiness, and the Government can impose taxes on the importance of securities.

Keep the Investors Safe from Fraudulent Transactions: Secondary transactions made through Stock Exchanges are safe. The risk of fraudulent transactions is reduced significantly, as the companies are enlisted in the stock exchanges following various regulatory protocols under the guidelines of SEBI.

In Conclusion:

It can be said that the primary capital market creates securities through IPOs and follow on offerings. In contrast, the secondary offerings imply interactions amongst traders through a stock exchange, with no involvement of the issuing company. The secondary offering is tailored to the need of the prospective subscribers belonging to all income brackets.

Additional Read:

Disclaimer:

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. Please note, IPO related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.