HOW DO PUBLIC COMPANIES RAISE FUNDS?
Corporations often need to raise external funding, or capital funding, to expand their businesses into new markets or locations, to invest in research & development , pay off debt, or to fend off the competition. And, while companies do aim to use the profits from ongoing business operations to fund such projects, it is often more favorable to seek external lenders or investors.
Public companies can raise money via stock exchanges through an initial public offering by issuing additional equity shares, or it could raise debt by issuing non convertible debentures or bonds. In IPO and bonds, both retail and institutional investors can participate. In the case of equity offering, it can be an IPO or a follow on offer if it’s already listed its securities. The company can also raise money through a rights issue to already existing investors. The other route is a private placement where the company issues securities to one large investor like a private equity fund or a select group of pre-identified institutional investors. So there are number of ways in which companies can raise capital.
As mentioned above FPO(Follow on Public Offer) also known as Further Public Offer is one of the methods of raising capital for public companies.
WHAT IS A FPO(FOLLOW ON PUBLIC OFFER)?
FPO is an abbreviation of a Follow-On Public Offer. The process of FPO starts after an IPO. FPO is a public issue of shares to investors at large by a publicly listed company. In FPO, the company goes for a further issue of shares to the general public with a view to diversifying its equity base. A prospectus is offered by the company. It is also known as secondary offering.
We have often come across the term ‘IPO’ or ‘FPO’ when we read about companies that are looking to gather funds for their operations or expansion. However, the name Initial Public Offering (IPO) is more commonly heard than Follow-on Public Offer (FPO) as there are fewer FPOs than IPOs.
How is an IPO different from an FPO?
In an IPO, the company is unlisted before its Initial Public Offering. This makes it a relatively high-risk investment since the potential investor may not have any track record of the company to analyse before investing.
An FPO, on the other hand, is offered when the company is already listed. This allows the investors to look at market trends and track their potential investment for a while before they make the decision.
While IPOs are used by private companies for fund expansion, a lot of government entities use FPOs to cover their debts or losses or reduce their stake in the company.
There are two types of FPOs:
Dilutive offering- A dilutive FPO is when the company wants to release more shares to collect more funds. This is done to pay off the debts. However, in the case of a dilutive FPO, a company’s value remains unchanged, which results in a decrease in the per-share earnings of the company.
Non-dilutive offering- In this case, the founders or large shareholders of the company release some of their shares to the public. The money from this goes to the individual offering the shares and not the company. Therefore, the per-share earnings of the company remain unaffected.
Regulatory requirements to issue an FPO :-
The issue of shares by a listed company, whether it be IPO, FPO, private equity or debt instruments is regulated by the Securities and Exchange Board of India (SEBI).
Some conditions a company must adhere to prior to promoting an IPO or FPO are that neither the Company nor its promoters or director or selling shareholders must be debarred from accessing the capital market nor must they be declared as a wilful defaulter or be an economic offender.
A listed company which has defaulted in interest payment or repayment of the principal amount in respect of debt instrument issued to the public is not permitted to promote an FPO of convertible debt instruments.
Examples of successful FPOs in the past The last decade has seen many successful FPOs, such as Tata Steel Ltd, Engineers India Ltd, Power Grid Corporation of India, Power Finance Corporation Ltd, and NTPC Ltd. The success of any IPO or FPO, however, depends upon various factors, including market sentiments, the pedigree of the company and its promoters, the earning capacity and potential of the company.