What is the Difference Between Equity IPO vs Debt IPO

A company can raise capital through two primary routes: an equity IPO and a debt IPO. In an equity IPO, the company issues equity shares and promoters dilute their ownership stake to raise capital. In a debt IPO, the company issues debt instruments at a fixed interest rate to raise capital.

This article discusses equity and debt IPOs, how they work, and how they differ.

What is an Equity IPO?

An equity IPO is a public offering in which a private company offers its equity shares to the public for the first time. By purchasing shares, investors acquire an ownership stake in the company and may benefit from share price appreciation and dividends.

The IPO can be divided into two main types:

• Fixed-price issue
• Book-building issue.

In a fixed-price issue, the company sets the IPO price, and investors apply at the same price. In a book-building issue, the company provides a price range, and investors apply at any price within that range.

An equity IPO can be a fresh issue, an offer-for-sale (OFS), or a combination of both. In a fresh issue of equity shares, the proceeds are used for business expansion, debt repayment, and other corporate actions.

In an OFS, existing investors sell their holdings to public investors to cash out their investment. Therefore, the proceeds go to the selling shareholders rather than the company.

What is a Debt IPO?

A debt IPO refers to a public issue of debt securities through which a company borrows money from investors. Unlike an equity IPO, investors do not receive an ownership stake in the company. Instead, they become creditors of the issuer.

Debt securities may include bonds, debentures, or any other debt instruments. The issuer agrees to pay interest under predetermined terms and repay the principal according to the maturity schedule.

Two major types of non-convertible debentures (NCDs) cannot be converted into equity shares.

• Secured NCDs

The issuing company’s assets back secured NCDs, making them a relatively safer investment option.

• Unsecured NCDs

No collateral backs unsecured NCDs. However, investors receive a slightly higher interest rate than on secured debentures.

Also Read: Investing in Debt Instruments

Difference Between Equity IPO and Debt IPO

The main difference between an equity IPO and a debt IPO is the instrument used to raise funds from the public. As the name suggests, an equity IPO issues equity shares, while a debt IPO issues debt instruments.

Here are the other differences:

Equity IPO vs Debt IPO: Which is Better?

Neither an equity IPO nor a debt IPO is inherently better; the right choice depends on the investment objective and risk considerations.

An equity IPO may suit investors seeking long-term growth through potential capital appreciation. A debt IPO may suit investors seeking interest income and principal repayment according to the issue terms.

Equity IPOs carry market and business risks, whereas debt IPOs carry credit, interest rate, and liquidity risks. The appropriate choice depends on individual financial goals, risk tolerance, and investment horizon.

FAQs

How do returns differ between an equity IPO and a debt IPO?

Equity IPOs provide returns based on market performance. The share value can rise and fall depending on the company’s growth and stock market performance. On the other hand, a debt IPO offers interest payments at a predetermined rate.

Do investors get ownership in a debt IPO?

No, investors in a debt IPO do not receive company ownership or voting rights. Instead, they act as creditors to the company and earn fixed interest payments.

Equity IPO and Debt IPO: Which is riskier for investors?

An equity IPO may carry greater market risk than a debt IPO because equity returns depend on market performance, while debt IPOs generally provide interest payments at predetermined rates.