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Governance

Indian Railway Finance Corporation: IPO

  • 19 Jan 2021
  • 5 min read

Why in News

The Initial Public Offering (IPO) of Indian Railway Finance Corporation (IRFC) got 65% subscription on the first day of bidding.

Key Points

  • First Issue:
  • Amount Raised:
    • Through the initial public offer, the Centre, the promoter of IRFC, will offload 13.6% stake in the company.
    • At the higher price band of Rs 26 per share, the government would raise Rs 3,243 crore and the company will have a market cap of Rs 23,845 crore.
  • Objective:
    • IRFC will use the IPO proceeds from the fresh issue to boost its capital base and general corporate purposes.
  • Other Government Interventions to Enhance Railway’s Efficiency:

Indian Railway Finance Corporation

  • About:
    • A subsidiary of the Indian Railways, it is the dedicated market borrowing arm of the Indian Railways.
  • Established:
    • It was incorporated in 1986.
  • Finance Model:
    • It follows a financial leasing model to finance the acquisition of rolling stock assets, which includes locomotives, coaches, wagons, trucks, flats, electric multiple units, containers, cranes, trollies, etc.
      • Finance Leasing Model:
        • Deriving revenues through the leasing model typically involves three parties: the seller, the buyer (lessee) and the financier (lessor).
        • In exchange for payment, ownership of an item (usually equipment) is transferred from the seller to the lessor.
        • The lessee then contracts with the lessor for the use of the item in exchange for a periodic fee.
        • The seller may or may not retake ownership of the item once the leasing contract has ended.
  • Contribution:
    • It plays a significant role in supporting the capacity enhancement of the Indian Railways by financing the majority proportion of their annual plan outlay which gives a long term business visibility, the brokerage feels.
  • Other Functions:
    • It is also into leasing railway infrastructure assets and national projects of the Government of India (project assets) and lending to other entities under the Ministry of Railways (MoR).

Initial Public Offering (IPO)

  • About:
    • IPO is the selling of securities to the public in the primary market.
      • Primary market deals with new securities being issued for the first time. It is also known as the new issues market.
      • It is different from the secondary market where existing securities are bought and sold. It is also known as the stock market or stock exchange.
    • It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public.
      • Unlisted companies are companies that are not listed on the stock exchange.
    • It is generally used by new and medium-sized firms that are looking for funds to grow and expand their business.
  • Benefits:
    • The funds raised by IPO allows the company to invest in new capital equipment and infrastructure.
    • An IPO paves way for listing and trading of the issuer’s securities on the Stock exchange market.
    • The IPO also allows the company to attract top talent because it can offer stock options to its employees. This enables the company to pay its executives fairly low wages initially. And later, in return, the employees as promised can cash out with the IPO.

Source: IE

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