In the realm of corporate finance and equity issuance, ‘At-the-Market’ (ATM) offerings have emerged as a dynamic and flexible alternative to traditional public offerings. These innovative mechanisms allow companies to raise capital strategically and efficiently, adapting to market conditions in real-time.
Join us as we navigate the evolving landscape of corporate financing through the lens of ATM offerings.
What is at the market equity offering?
An “At-the-Market” (ATM) equity offering is a flexible method through which publicly traded companies can issue and sell their shares directly to the market at prevailing market prices.
Unlike traditional public offerings, ATMs empower companies to access capital without a fixed offering price or predetermined volume, allowing them to adapt to real-time market conditions.
This approach offers financial flexibility, enabling firms to seize favourable market opportunities while reducing the risk of share price dilution. ATM offerings are particularly popular among companies seeking to raise capital incrementally or respond to evolving financing needs in a dynamic market environment.
Also read: Equity share capital
How does ATM market offerings work
- Eligibility: Indian regulations stipulate that only companies that meet certain criteria, including a minimum net worth and profitability, can undertake ATM offerings.
- Board approval: The board of directors of the issuing company must approve the issuance. They also set the floor price, which is the minimum price at which shares can be sold during the offering.
- Registrar of companies (RoC) approval: The company files a letter of offer and placement document with the RoC. This document includes comprehensive information about the offering, financial statements, and the intended use of proceeds.
- Engagement of intermediaries: The company appoints intermediaries, including investment banks and law firms, to facilitate the offering. These intermediaries help determine the floor price, manage the offering, and ensure compliance with regulatory requirements.
- Market entry: Shares are then sold to qualified institutional buyers (QIBs) directly on the stock exchange. The sales occur at or above the floor price.
- Real-time adjustments: The issuing company, along with its intermediaries, continually monitors market conditions and may adjust the offering parameters if necessary.
- Proceeds: The proceeds from the sale go to the company, providing a direct source of capital for various corporate purposes.
Also read: What is equity share?
Atm in stock market
In the stock market, “At-the-Market” (ATM) offerings play an important role in enabling publicly traded companies to access capital efficiently and flexibly. Unlike traditional offerings with fixed prices, ATMs allow companies to sell their shares directly to the market at prevailing prices.
This flexibility is invaluable for adapting to changing market conditions and capitalising on favourable price movements.
ATM share price offerings offer an incremental and real-time approach to raising capital, reducing the risk of share price dilution, and providing a means for companies to meet evolving financing needs. They are a significant tool for corporate finance, offering a dynamic means of accessing capital while responding to the ever-shifting dynamics of the stock market.
Also read: What is secondary public offering
What is order ID in ATM?
An order ID is a unique identifier associated with a specific transaction. It serves as a reference point for tracking and managing orders placed within an ATM offering.
This identifier helps market participants, such as the issuing company and its agent, monitor the execution and details of individual orders, including the number of shares, pricing, and timing.
Risks and challenges
Market price volatility: Selling shares at prevailing market prices means exposure to price fluctuations. Market volatility can impact the offering’s success and the funds raised.
Dilution of existing shareholders: Frequent ATM offerings can lead to dilution of existing shareholders’ equity as more shares enter the market.
Timing risk: Market timing is crucial. Poor timing may result in lower offering prices, reducing the capital raised.
Regulatory compliance: Adherence to regulatory requirements is essential. Non-compliance can lead to legal issues and penalties.
Mispricing risk: The floor price, set for an offering, may not reflect the true value of the company’s shares, affecting investor sentiment.
Market impact: Large offerings may impact the stock’s market price adversely, causing more significant price declines.
Investor perception: Frequent ATM offerings might signal financial instability or poor planning, affecting investor confidence.
Overuse: Frequent ATM offerings may lead to excessive dilution and oversupply of shares, negatively impacting share prices.
Liquidity risk: Liquidity can be a problem, especially if the company issues a large volume of shares too quickly.
Costs and fees: The expenses associated with ATM offerings, including underwriting fees and legal costs, can erode the funds raised.
Company X Ltd., a publicly traded company, wishes to raise additional capital for its expansion plans. The company has already been trading on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) Ltd. and has registered its securities for ATM offerings.
- Company X’s Share Price: ₹ 100 per share
- Number of Authorised Shares: 1 crore
- Number of Outstanding Shares: 50 Lakhs
Now, Company X engages a financial institution as its agent to facilitate the ATM offering. They decide to raise capital by selling shares directly to the market.
ATM Offering Parameters:
- Maximum Number of Shares to be Issued: 2 Lakhs
- Floor Price (Minimum Selling Price): ₹ 90 per share
Company X and its agent continuously monitor market conditions. If the market price of Company X’s shares exceeds ₹ 90, they may initiate the sale. Consider two scenarios:
- The market price is ₹ 95 per share.
- Company X decides to issue 50,000 shares.
- The market price is ₹85 per share.
- Company X does not issue any shares as they are below the floor price.
In the first scenario, Company X successfully raises ₹4,750,000 (50,000 shares at ₹95 each) through the ATM offering, while in the second scenario, they do not issue any shares as the market price falls below the floor price.
Also read: Outstanding shares
In summary, At-the-Market (ATM) offerings are a flexible and efficient tool for corporate finance. They provide real-time adaptability and cost-effectiveness in raising capital. Yet, these benefits come with risks such as dilution and market impact. Success in ATM offerings requires strategic planning and regulatory compliance.
As a dynamic solution in modern finance, ATMs respond to evolving market conditions, underlining their role in capital market innovation.
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