What is an FPO ?
A Follow-on Public Offer (FPO) is a process in which an already listed company raises additional capital from the public also called as further public offer.
A company that is already publicly traded will sometimes sell stock to the public again. This type of offering is called a FOLLOW-ON OFFERing, or a secondary offering. One reason for
a follow-on offering is the same as a major reason for the initial offering: a company may be growing rapidly, either by making acquisitions or by internal growth, and may simply require additional capital.
When a listed company comes out with a fresh issue of shares or makes an offer for sale to the public to raise funds it is known as FPO. In other words, FPO is the consequent issue to the public after initial public offering (IPO). The word FPO came into news after the YES Bank announcement to raise Rs 2,000 crore through FPO and debt.
Another reason that a company would issue a follow-on offering is similar to the cashing out scenario in the IPO. In a secondary offering, a large existing shareholder (usually the largest shareholder, say, the CEO or founder) may wish to sell a large block of stock in one fell swoop.
The reason for this is that this must be done through an additional offering (rather than through
a simple sale on the stock market through a broker), is that a company may have shareholders with "unregistered" stock who wish to sell large blocks of their shares. By SEC decree, all stock must first be registered by filing an S-1 or similar document before it can trade on a public stock exchange. Thus, pre-IPO shareholders who do not sell shares in the initial offering hold what is called unregistered stock, and are restricted from selling large blocks unless the company registers them. (The equity owners who hold the shares sold in an offering, whether it be an IPO or a follow-on, are called the selling shareholders.)
In short, both IPO and FPO are process of raising funds from the public.
The basic difference between Initial Public Offer (IPO) and Follow on Public Offer (FPO) is as the names suggest that,
IPO is for the companies which have not listed on an exchange and
Companies usually go to debt market for raising their short term needs. Either they issue bonds or get loans. But if they have massive expansion plans they may not raise sufficient funds in the debt market and even if they could it costs more. Companies come up with FOLLOW ON OFFER to restructure their business or to raise funds for new business or to expand the existing business.
Similar to an IPO a price band is fixed (usually with the help of Investment banks) for the issue and interested investors can apply for it. Unlike the corporate actions (such as bonus, rights issue which are applicable only to the existing stake holders) FPO is open to all investors. The price band for the FPO depends on the market value of the existing company shares and the reason for raising funds.
In an FPO shares are issued in any of the ways listed below.
1. Promoters dilute their stake by offering some of their shares to the public.
2. Company issue fresh shares.
3. A combination of the above two approaches.
HOW IS IT DIFFERENT FROM AN IPO?
As the name suggests initial public offering (IPO) is the first offer for purchase to public. This is a process when an unlisted company raises funds by offering its shares to the public and consequently gets listed on a stock exchange.
A company can either issue fresh securities or offer its existing securities to public. However, if the same company comes out with another issue to the public, the second issue would be called an FPO. For instance, ICICI Bank was a listed entity but came out with FPO of around Rs 8,750-crore equity shares in July 2007.
The issue remained open for subscription between July 19, 2007, and July 22, 2009. Similarly Bharat Earth Movers (BEML), which was listed in National Stock Exchange on November 5, 2003, came out with a public offer of 49 lakh shares in 2007. Shares of BEML were issued at Rs 1,075 after the closure of the FPO.
Under the Fast Track Issues (FTI), a listed company, which meets certain entry norms, can proceed further with FPOs by filling a copy of RHP to regulators. These companies don’t need to file a draft offer document. However, it is mandatory for a private company, which wants to come out with an IPO.
A Follow-on Public Offer (FPO) is a process in which an already listed company raises additional capital from the public also called as further public offer.
A company that is already publicly traded will sometimes sell stock to the public again. This type of offering is called a FOLLOW-ON OFFERing, or a secondary offering. One reason for
a follow-on offering is the same as a major reason for the initial offering: a company may be growing rapidly, either by making acquisitions or by internal growth, and may simply require additional capital.
When a listed company comes out with a fresh issue of shares or makes an offer for sale to the public to raise funds it is known as FPO. In other words, FPO is the consequent issue to the public after initial public offering (IPO). The word FPO came into news after the YES Bank announcement to raise Rs 2,000 crore through FPO and debt.
Another reason that a company would issue a follow-on offering is similar to the cashing out scenario in the IPO. In a secondary offering, a large existing shareholder (usually the largest shareholder, say, the CEO or founder) may wish to sell a large block of stock in one fell swoop.
The reason for this is that this must be done through an additional offering (rather than through
a simple sale on the stock market through a broker), is that a company may have shareholders with "unregistered" stock who wish to sell large blocks of their shares. By SEC decree, all stock must first be registered by filing an S-1 or similar document before it can trade on a public stock exchange. Thus, pre-IPO shareholders who do not sell shares in the initial offering hold what is called unregistered stock, and are restricted from selling large blocks unless the company registers them. (The equity owners who hold the shares sold in an offering, whether it be an IPO or a follow-on, are called the selling shareholders.)
In short, both IPO and FPO are process of raising funds from the public.
The basic difference between Initial Public Offer (IPO) and Follow on Public Offer (FPO) is as the names suggest that,
IPO is for the companies which have not listed on an exchange and
FPO is for the companies which have already listed on exchange but
want to raise funds by issuing some more equity shares.
Companies usually go to debt market for raising their short term needs. Either they issue bonds or get loans. But if they have massive expansion plans they may not raise sufficient funds in the debt market and even if they could it costs more. Companies come up with FOLLOW ON OFFER to restructure their business or to raise funds for new business or to expand the existing business.
Similar to an IPO a price band is fixed (usually with the help of Investment banks) for the issue and interested investors can apply for it. Unlike the corporate actions (such as bonus, rights issue which are applicable only to the existing stake holders) FPO is open to all investors. The price band for the FPO depends on the market value of the existing company shares and the reason for raising funds.
In an FPO shares are issued in any of the ways listed below.
1. Promoters dilute their stake by offering some of their shares to the public.
2. Company issue fresh shares.
3. A combination of the above two approaches.
HOW IS IT DIFFERENT FROM AN IPO?
As the name suggests initial public offering (IPO) is the first offer for purchase to public. This is a process when an unlisted company raises funds by offering its shares to the public and consequently gets listed on a stock exchange.
A company can either issue fresh securities or offer its existing securities to public. However, if the same company comes out with another issue to the public, the second issue would be called an FPO. For instance, ICICI Bank was a listed entity but came out with FPO of around Rs 8,750-crore equity shares in July 2007.
The issue remained open for subscription between July 19, 2007, and July 22, 2009. Similarly Bharat Earth Movers (BEML), which was listed in National Stock Exchange on November 5, 2003, came out with a public offer of 49 lakh shares in 2007. Shares of BEML were issued at Rs 1,075 after the closure of the FPO.
Under the Fast Track Issues (FTI), a listed company, which meets certain entry norms, can proceed further with FPOs by filling a copy of RHP to regulators. These companies don’t need to file a draft offer document. However, it is mandatory for a private company, which wants to come out with an IPO.
What are the regulatory requirements?
In case, a company wants to come out with FPO and have changed its name within a year, at least 50% of the revenue of the last one-year must have come from the activities defined by the new name. The size of the issue should not be more than five times the pre-issue net worth of the company as mentioned in the balance sheet of the previous financial year.
Nevertheless, a group of companies - private and public sector banks - are exempt from these norms. Also, infrastructure companies whose projects have been appraised and financed by any public financial institution or companies such as IDFC and IL&FS do not need to comply with these norms. Also, the promoter must contribute at least 20% of the post-issue capital or 20% of the issue size.
IPO vs. FPO – Which is better?
Investment in IPO is more lucrative than investing in FPO in terms of returns. However an investor has better information in an FPOas against IPO. As the stock is already listed, the respective company has to provide information based on the market regulator guidelines. In my opinion, investment in FPOs can be considered if the stock is available at a discount than the listed price.
THE PROCESS.
The follow-on offering process differs little from that of an IPO, and actually is far less complicated. Since underwriters have already represented the company in an IPO, a company often chooses the same managers, thus making the hiring the manager or beauty contest phase much simpler. Also, no real valuation work is required (the market now values the firm's stock), a prospectus has already been written, and a roadshow presentation already prepared. Modifications to the prospectus and the roadshow demand the most time in a follow-on offering, but still can usually be completed with a fraction of the effort required for an initial offering.
Bond offerings
When a company requires capital, it sometimes chooses to issue public debt instead of equity. Almost always, however, a firm undergoing a public bond deal will already have stock trading in the market. (It is relatively rare for a private company to issue bonds before its IPO.)
The reasons for issuing bonds rather than stock are various. Perhaps the stock price of the issuer is down, and thus a bond issue is a better alternative. Or perhaps the firm does not wish to dilute its existing shareholders by issuing more equity. Or perhaps a company is quite profitable and wants the tax deduction from paying bond interest, while issuing stock offers no tax deduction. These are all valid reasons for issuing bonds rather than equity. Sometimes in down markets, investor appetite for public offerings dwindles to the point where an equity deal just could not get done (investors would not buy the issue).
The bond offering process resembles the IPO process. The primary difference lies in:
In case, a company wants to come out with FPO and have changed its name within a year, at least 50% of the revenue of the last one-year must have come from the activities defined by the new name. The size of the issue should not be more than five times the pre-issue net worth of the company as mentioned in the balance sheet of the previous financial year.
Nevertheless, a group of companies - private and public sector banks - are exempt from these norms. Also, infrastructure companies whose projects have been appraised and financed by any public financial institution or companies such as IDFC and IL&FS do not need to comply with these norms. Also, the promoter must contribute at least 20% of the post-issue capital or 20% of the issue size.
IPO vs. FPO – Which is better?
Investment in IPO is more lucrative than investing in FPO in terms of returns. However an investor has better information in an FPOas against IPO. As the stock is already listed, the respective company has to provide information based on the market regulator guidelines. In my opinion, investment in FPOs can be considered if the stock is available at a discount than the listed price.
THE PROCESS.
The follow-on offering process differs little from that of an IPO, and actually is far less complicated. Since underwriters have already represented the company in an IPO, a company often chooses the same managers, thus making the hiring the manager or beauty contest phase much simpler. Also, no real valuation work is required (the market now values the firm's stock), a prospectus has already been written, and a roadshow presentation already prepared. Modifications to the prospectus and the roadshow demand the most time in a follow-on offering, but still can usually be completed with a fraction of the effort required for an initial offering.
Bond offerings
When a company requires capital, it sometimes chooses to issue public debt instead of equity. Almost always, however, a firm undergoing a public bond deal will already have stock trading in the market. (It is relatively rare for a private company to issue bonds before its IPO.)
The reasons for issuing bonds rather than stock are various. Perhaps the stock price of the issuer is down, and thus a bond issue is a better alternative. Or perhaps the firm does not wish to dilute its existing shareholders by issuing more equity. Or perhaps a company is quite profitable and wants the tax deduction from paying bond interest, while issuing stock offers no tax deduction. These are all valid reasons for issuing bonds rather than equity. Sometimes in down markets, investor appetite for public offerings dwindles to the point where an equity deal just could not get done (investors would not buy the issue).
The bond offering process resembles the IPO process. The primary difference lies in:
(1) the focus of the prospectus (a prospectus for a bond offering will emphasize the company's stability and steady cash flow, whereas a stock prospectus will usually play up the company's growth and expansion opportunities), and
(2) the importance of the bond's credit rating (the company will want to obtain a favorable credit rating from a debt rating agency like S&P or Moody's, with the help of the "credit department" of the investment bank issuing the bond; the bank's credit department will negotiate with the rating agencies to obtain the best possible rating). As covered in Chapter 5, the better the credit rating - and therefore, the safer the bonds - the lower the interest rate the company must pay on the bonds to entice investors to buy the issue. Clearly, a firm issuing debt will want to have the highest possible bond rating, and hence pay a lower interest rate (or yield).
As with stock offerings, investment banks earn underwriting fees on bond offerings in the form of an underwriting discount on the proceeds of the offering. The percentage fee for bond underwriting tends to be lower than for stock underwriting. For more detail on your role as an investment banker in stock and bond offerings, see Chapter 8.
What are the other kinds of issues through which companies raise money?
Apart from IPO and FPO, a company can raise funds through a rights issue and private placement. A rights issue and bonus issue are made to the existing shareholders. However, a rights issue is also a way to raise funds but in a bonus issue new securities are issued to existing shareholders without any consideration.
As with stock offerings, investment banks earn underwriting fees on bond offerings in the form of an underwriting discount on the proceeds of the offering. The percentage fee for bond underwriting tends to be lower than for stock underwriting. For more detail on your role as an investment banker in stock and bond offerings, see Chapter 8.
What are the other kinds of issues through which companies raise money?
Apart from IPO and FPO, a company can raise funds through a rights issue and private placement. A rights issue and bonus issue are made to the existing shareholders. However, a rights issue is also a way to raise funds but in a bonus issue new securities are issued to existing shareholders without any consideration.
