Q.Sai Ltd. Company is newly incorporated public company and wants to raise capital by selling equity shares to the public. The Board of Directors are considering various options for this. Advise the Board on the following matters:
What should the company offer – IPO or FPO?
Can the company offer Bonus shares to raise its capital?
Can the company enter into Underwriting Agreement?

The Board is advised to: offer an IPO (not FPO); it cannot raise fresh capital by issuing bonus shares; and it can enter into an underwriting agreement.

(1) IPO or FPO?

Sai Ltd. is a newly incorporated company offering its equity shares to the public for the very first time. A first-time public offer is called an Initial Public Offer (IPO). A Follow-on Public Offer (FPO) is made by a company that is already listed and has issued shares to the public before. Therefore the company should offer an IPO.

(2) Can the company offer Bonus shares to raise capital?

No. Bonus shares are issued free of cost to existing shareholders by capitalising the company's accumulated profits and reserves. No money flows into the company from a bonus issue, so it does not raise any fresh capital. Moreover, a newly incorporated company has no accumulated reserves and no existing shareholders to receive bonus shares. Hence bonus shares cannot be used to raise capital.

(3) Can the company enter into an Underwriting Agreement? …