Objects of the Issue
This is arguably the most critical section of the RHP. It answers: "Where is my money going?" When you buy an IPO, you are giving cash to someone. Who keeps it?
1. Fresh Issue vs. Offer For Sale (OFS)
Fresh Issue (Growth Capital)
New shares are printed and sold. The money goes into the Company's Bank Account.
- Purpose: Expansion, paying off debt, R&D.
- Sentiment: POSITIVE. The money stays in the business to help it grow.
Offer For Sale (Exit Capital)
No new shares are created. Existing shareholders (Promoters, VCs, Angel Investors) sell their old shares to you. The money goes to Their Personal Bank Accounts.
- Purpose: Investors want to cash out and buy a yacht.
- Sentiment: NEUTRAL/NEGATIVE. The company gets ₹0 benefit from this money.
Analyzing the "Use of Proceeds"
The RHP will breakdown exactly how the Fresh Issue money will be spent.
The Good Uses (Green Flags)
- Capex: Setting up a new plant, buying machinery. (Future Growth).
- Debt Reduction: Repaying high-interest bank loans. (Instant profit boost by saving interest).
- Acquisitions: Buying a competitor.
The Bad Uses (Red Flags)
- General Corporate Purposes (GCP): "We don't know yet, we'll figure it out." (Acceptable if < 25%, suspicious if high).
- Marketing/Branding: Burning cash on ads to show fake growth (common in startups).
- Paying Promoters: Buying land/assets from the promoter himself.
| Use of Funds | Verdict | Why |
|---|---|---|
| Repayment of Borrowings | Great | Balance sheet becomes lighter, profits jump |
| Funding Working Capital | Good | Needed for day-to-day expansion |
| Offer for Sale (100%) | Caution | Promoters losing faith or VCs exit clock ticking? |
| Purchase of Office | Neutral | Can be valid asset creation |
Always check the ratio. A mix of 70% Fresh Issue / 30% OFS is healthy. A 100% OFS IPO usually means the company is fully matured and growth might be stalled.
If an IPO is 100% 'Offer for Sale' (OFS), where does the money go?
Sources & Disclaimer
- SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
- SEBI Guidelines for Red Herring Prospectus (RHP) Format
Note: Any benchmarks (e.g., "Good ROE is > 20%", or specific P/E ranges) are simplified industry heuristics for educational purposes. True evaluation depends on specific industry context, market cycles, and individual company circumstances.