Introduction

  A Follow-On Public Offer (FPO) is a process through which an already listed company raises additional capital by offering shares to the public. It is similar to an Initial Public Offer (IPO), except that the company has already gone public and is listed on the stock exchange.  

Key Differences between FPO and Rights Issue

  People often confuse Rights Issues and FPOs, as both are ways for a company to raise funds through the equity markets. However, there are several key differences:  1. Eligibility:

•  Rights Issue: Only available to existing shareholders. If you are a shareholder of the company on the record date, you can subscribe to the rights issue.
• FPO: Open to the public, meaning both existing shareholders and new investors can participate.

 2. Process:

• Rights Issue: Shareholders are given rights entitlements to purchase additional shares, which can be exercised up to a specific date.
• FPO: Open to the public, and investors can subscribe within a set period, like an IPO, with no restriction to only existing shareholders

  3.Pricing:

• Rights Issue: Typically offered at a discount to encourage participation among existing shareholders.
• FPO: Offered at the current market price or at a slight discount to minimize the dilution effect on existing shareholders.

4. Purpose and Use:

• Rights Issue: Preferred for smaller amounts of capital or when the company doesn’t intend to expand its investor base significantly.
• FPO: Used for raising larger sums of capital for expansion, debt reduction, or significant funding needs that rights issues cannot fulfill.

 

Understanding the Concept of an FPO

  An FPO is a means for listed companies to raise additional capital from the public. Unlike an IPO, where a company is going public for the first time, an FPO is issued by a company that is already listed on the stock exchange. Example: Companies such as Yes Bank and Vodafone Idea have opted for FPOs when they required significant capital for operations. FPOs allowed them to tap a broader investor base, which was necessary to meet their funding needs.

Regulatory Process and Pricing in FPOs

  Like an IPO, FPOs are regulated by the Securities and Exchange Board of India (SEBI). The process includes: 1. Detailed Disclosures: Companies must provide extensive information, such as financials and the purpose of raising funds. 2. Transparent Pricing: Since the company is already publicly traded, there is more available data to guide pricing decisions. Though investing in an FPO carries risks, it is generally considered less risky compared to an IPO due to the availability of public information.

Steps in a Follow-On Public Offer (FPO)

  The FPO process involves several key steps: 1. Assessment of Funding Needs:

• Companies assess their funding requirements, keeping in mind the potential dilution of equity.

2. Regulatory Approvals:

•  The company files a Draft Red Herring Prospectus (DRHP) with SEBI, followed by a Red Herring Prospectus (RHP) after receiving approval.

3. Price Band Fixation:

•  A price band is set for the FPO, often through a book-building process, where investors place bids.

4. Offer Period:

• The FPO is open for subscription for a period of 3-4 days.

5. Allotment and Listing:

• After the offer closes, the company finalizes the allotment, and shares are credited to investors’ demat accounts.

6. Post-Offer Monitoring:

•    The company ensures that the raised funds are used as promised and in accordance with the stated goals.

 

Dilutive Vs Non-Dilutive FPO

  FPOs can be either dilutive or non-dilutive: 1. Dilutive FPO:

• New shares are issued to raise capital, resulting in a dilution of the Earnings Per Share (EPS).

2. Non-Dilutive FPO:

• Existing shareholders sell their shares, increasing the liquidity and free float without diluting EPS.

 

Key Merits of Issuing FPOs

 

For Companies:

• Quick Access to Funds: Companies can raise substantial capital quickly for expansion or debt reduction.
• Strengthens Balance Sheet: An FPO can improve the company’s financial position by reducing debt or funding growth initiatives.

 

For Investors:

•  Opportunities in Established Companies: FPOs provide a chance to invest in companies with a proven track record.
• Lower Risk than IPOs: Public information available from the company makes FPOs less risky than IPOs.

    Disclaimer: Investment in securities markets is subject to market risks. Read all related documents carefully before investing. Opening an account does not guarantee allotment of shares in an FPO. Investors are advised to perform their own due diligence before investing. Brokerage will not exceed SEBI prescribed limits.