IPO
Through IPO, the company comes for the first time to be listed in the stock market, after being listed in the stock market, shares can be bought and sold every day. In an IPO, the promoters of the company sell a percentage of the company’s shares to the general public. We have talked about the reasons for bringing an IPO in detail in Chapter 4 and Chapter 5.
The main reason for bringing an IPO is to raise capital for the company. This allows the company to expand itself. Through IPO, the old investors of the company also get a way to withdraw their investment. Even after the IPO comes and the sale of shares of the company starts in the secondary market, the promoter may need more capital. For which it has three avenues before it: Rights Issue, Offer for Sale (OFS), and Follow-on Public Offer (FPO).
Rights Issue
The promoter can raise more capital by giving more new shares to its existing shareholders. In a rights issue, these new shares are given at a price lower than the current market price. New shares are given to the old shareholders in proportion to the number of shares they currently hold. For example, in a 4:1 rights issue, for every four shares, they will be given an additional share. This looks like a good way to raise capital, but in this, the company has a way to raise money from very few people. It may also happen that the old shareholders do not want to invest any more money. The coming of a rights issue reduces the value of their earlier shares for the old shareholders.
An example of a rights issue is South Indian Bank which did a 1:3 issue. In this, the existing shareholders were given shares at a price of Rs 14, which was 30% below the market price (market price of Rs 20 as on record date 17 February 2014). The bank gave 45.07 lakh shares to its existing shareholders.
The rights issue is discussed in detail in Chapter 11.
Offer for Sale-OFS
Unlike a rights issue, the promoter can bring a secondary issue of shares for the entire market. It does not have an existing shareholder bond. Exchanges provide the facility of selling through brokers for OFS. Exchanges allow this offer only if the promoters want to sell their shares and at the same time do not violate the minimum limit of public shareholding. For example, the limit of public shareholding in government companies i.e. PSUs is 25%.
OFS has a floor price that the company decides. Above this price, both retail and non-retail investors can place bids. Shares are allotted in all the bids above the cut-off price. The exchange settles these shares in the Demat account on T+1 day.
An example of OFS is that of NTPC Limited which offered 46.35 million (4.635 crore) shares at a floor price of Rs 168. This issue was fully subscribed in 2 days. The offer for sale was open on 29 August 2017 for retail investors and on 30 August 2017 for non-retail investors.
Follow-on Public Offer-FPO
The main purpose of FPO is also to raise additional capital. This is also a way to raise capital after the shares are listed but in this, a different process is followed for application and allotment. In FPO, shares can be diluted and new shares can also be issued which can be allotted to the investors. Like IPO, FPO also requires a merchant banker who prepares a red-haired prospectus and submits it to SEBI and bidding can be started after SEBI approval. The time taken for bidding is 3-5 days. Investors can place their bids through ASBA (Application Supported by Blocked Amount). After the book building, when the cut-off price is fixed, then the shares are allotted. Since the introduction of OFS in 2012, FPOs are rarely used to raise capital as the process is a bit lengthy.
The company fixes a price band and the FPO is advertised. Investors who want to invest in this can invest money through the ASBA route or through any bank branch. The cut-off price is fixed at the end of the bidding process. The cut-off price is decided based on the demand for the shares. The shares are then allotted and they are listed on the stock exchange.
An example of an FPO is Engineers India Limited. The company came out with the issue in February 2014. The price band in the issue was Rs 145 to 150. The issue was subscribed 3 times and the stock was selling at ₹151.10 on the first day of trading. This means the lower price band of the issue was 4.2% below the market price.
Difference between OFS and FPO
OFS is used to reduce the shareholding of the promoter whereas FPO is used to raise capital for a new project.
In FPO, as the number of shares increases, the shareholding pattern changes. Whereas in OFS the number of authorized shares does not change.
According to the market capitalization, only the above 200 companies get the facility to raise money from OFS whereas all the companies can raise money through FPO route.
Ever since SEBI has opened the way of OFS, FPO arrivals have reduced and companies prefer to raise money through OFS.
Gaurav Heera is a well known name in the field of stock market analysis and education. His distinguished career, which spans more than ten years, has cemented his reputation as an expert with unparalleled knowledge and innovative strategies for navigating the intricate landscape of the financial markets.
