A company needs money to grow its business. It decides to bring an Initial Public Offering or IPO. The company asks the public for capital. Investors give their hard-earned money to the company. But every investor asks one simple question before they invest. What will the company do with my money? The ‘Objects of the Issue’ section answers this specific question.
Objects of the Issue in IPO – This section is a mandatory part of the offer document. It is also found in the Red Herring Prospectus or RHP. It acts as a transparent map for the funds and shows the strategic direction of the business. It also shows the financial discipline of the management.
Common Components of Objects of the Issue
You must understand how money moves in an IPO. For that, let us first understand the difference between a fresh issue and an OFS. An IPO may have these two parts.
- The first part is the Fresh Issue of shares – The company creates new shares in a Fresh Issue. It sells these new shares to the public. The company receives the money from this sale directly. The ‘Objects of the Issue’ applies only to this Fresh Issue portion.
- The second part is the Offer for Sale or OFS – Existing shareholders sell their old shares in an OFS. These shareholders can be promoters or early investors. The money from an OFS goes to these individual sellers. The company does not get any money from an OFS. You will not find ‘Objects of the Issue’ for the OFS part. Investors must check the ratio between Fresh Issue and OFS. A large Fresh Issue means the company wants to invest in itself.
Companies divide the total money into different buckets. Each bucket serves a different business need. They are explained below.
- Capital Expenditure (CapEx)
This is the most common reason for an IPO. A company wants to build a new factory. It needs to buy heavy machinery. It might want to upgrade its existing technology. These activities fall under Capital Expenditure. CapEx shows that the company wants to expand its capacity. It suggests that the company expects more demand in the future. Investors usually like to see a high percentage of funds in this bucket. It represents long-term growth.
- Repayment or Prepayment of Borrowings
Many companies carry heavy debt on their balance sheets. High debt means high interest payments every month. The company uses IPO money to pay back these loans. This move reduces the interest burden of the firm. It improves the net profit margin immediately. A cleaner balance sheet makes the company stronger. It also improves the credit rating of the business.
- Working Capital Requirements
A business needs cash for its daily operations. It needs money to buy raw materials. It needs funds to maintain inventory levels. It must pay salaries to its employees. These daily expenses are called working capital. A growing company needs more working capital. The IPO proceeds provide this necessary liquidity. It ensures that the business runs without any breaks.
- General Corporate Purposes
This is a flexible bucket for the company. The management uses this money for administrative costs. They might spend it on brand building or marketing. It covers unforeseen business needs. It also covers employee incentive schemes. SEBI has strict rules for this category. A Mainboard IPO can only use 25% of the total money for this. An SME IPO has a lower limit of 15% or 1,000 lakhs. This rule prevents companies from being too vague with the money.
The process of bringing an IPO is expensive. The company hires merchant bankers to manage the issue. It pays fees to legal advisors and auditors. It pays the registrar and regulatory bodies. There are costs for printing and advertising. The company uses a small part of the IPO funds to cover these costs. Investors can see exactly how much money goes into these fees.
Evaluation Checklist for You
| Evaluation Point | What to Look For |
|---|
| Clarity | Are the goals specific and clear? |
| Proportion | Is most of the money going toward growth? |
| Strategic Fit | Does the plan match the company’s past work? |
| Track Record | Has the company used past funds wisely? |
Why Should Investors Study This Section?
The ‘Objects of the Issue’ section reveals the truth about the promoters. It tells you if the company has a clear plan. Vague statements are a bad sign for investors. A good company gives specific details. For example, it will name the exact city for a new plant. It will list the specific machines it wants to buy.
This section also shows the “Execution Capability” of the team. Investors check if the plan is realistic. If a company wants to enter a new business, does it have the experience? If it wants to double its capacity, is there enough demand? The objects must align with the current business model.
Red Flags to Watch Out For
Investors must be careful while reading the prospectus. Some companies use the IPO money poorly. Look out for these warning signs:
- Vague Objectives: The company says it will use money for “business expansion” without details.
- Promoter Loan Repayment: The company uses public money to pay back loans taken by the promoters personally.
- Unrelated Projects: A textile company wants to start a real estate project suddenly.
- High Issue Expenses: The fees for bankers and lawyers are unusually high.
- No Time Frame: The company does not say when it will start using the funds.
Regulatory Protection for Investors
SEBI ensures that companies do not lie about the money. The company must provide a “Deployment Schedule” in the RHP. This schedule shows the timeline for spending the money. The company cannot sit on the cash forever.
The company also needs a “Utilization Certificate” from the auditors. This certificate proves that the company used the money for the stated goals. If a company changes its plan, it must inform the shareholders. It might even need a special resolution to change the objects later. This system creates accountability.