Your Questions Answered: I'm 34 and want to invest in FPO. Can you elaborate the process and pricing of a rights issue?

Q. I am a 34-year-old medical doctor working with one of the biggest hospital chains in Delhi-NCR. I generally stay away from IPOs and invest only in blue-chip companies both individually and through stocks. However, in the recent past, I have learnt that blue chip companies from time to time undertake a follow-on public offer to raise further capital through the stock exchange. I am not sure about the process as well as the pricing of a rights issue, can you please elaborate on the same?

Neha Vadhwani, Gurgaon, Haryana

Introduction

A follow-on public offering (“FPO”) is the issuance of shares by an already listed company through a public offering. Many blue-chip companies in the recent past have raised a substantial amount of money through fast-track FPOs which is a sub-category of FPOs. We will be elaborating on fast-track FPOs here since they are the most prevalent form of FPOs.

Purpose

A company undertakes a FPO for a variety of reasons, such as the need for capital to pay off debt or make an acquisition or takeover. A company may also undertake an FPO to simply obtain capital in order to refinance its existing debt. Investors must exercise caution and carefully consider the rationale behind FPO and read all offer documents in detail before subscribing to a FPO.

Eligibility criterion

A company can undertake a fast-track FPO if it meets the following eligibility criterion:

The average market capitalisation of public shareholders should not be less than ₹1,000 Crore. The average market capitalisation of public shareholders is calculated by multiplying the total outstanding shares held by non-promoter entities multiplied by the market price of these shares divided by the period of reference (one year in case of FPOs).

A company cannot issue a fast-track FPO if it has a pending show cause notice which has been issued by the Securities and Exchange Board of India (SEBI) or had initiated prosecution proceedings against the company undertaking the FPO.

A company cannot undertake an FPO if such company or its promoter or promoter group or its director had settled any alleged violation of securities laws via the consent or settlement mechanism with SEBI during the previous three years.

A company cannot undertake an FPO if the sum total of quantifiable audit qualifications and audit qualification included in its latest audit report of its audited financial statement exceeded 5% of its net profit or net loss.

Difference between IPO And FPO

When a company gets listed on a stock exchange for the first time by offering shares to the general public for the first time the process is called Initial Public Offer (“IPO”). Investors have a limited amount of knowledge about the company and its performance at the time of IPO since prior to getting listed, companies are subject to a different regulatory regime wherein SEBI regulations are not applicable to them which results in a lower threshold in respect of transparency, disclosure and corporate governance.

On the other hand, an FPO is offered by a company that has already gone public in the past and is listed on a stock exchange. As a result, it is in compliance with the regulatory regime applicable to listed companies which results in a higher threshold in respect of transparency, disclosure and corporate governance

Investors in cases of FPO have access to a lot more information than in case of IPO because they can deep dive into the disclosure made by the FPO-bound company from time to time under the relevant SEBI regulations and disseminated by the stock exchange.

Who should invest in FPOs?

In the case of FPO prospective investors are more familiar with the company, its management, and its business practices, investors may stand to gain more by participating in an FPO than they would through an IPO. Additionally, investors can spot trends in earnings reports, stock market performance, and a variety of other data. 

Essentially for a retail investor the amount of historical data available in the case of a FPO is greater than the data available in case of an IPO, consequently, FPOs are considered less risky than IPOs, however, it is important to note that all investments in equities are subject to market risk.

Investors must, as with any other investment, thoroughly investigate the company and its track record prior to investing in the FPO. Investing in FPO is best suited for investors who are able to pick market trends and are good at deciphering a company’s financials.

How to apply for an FPO?

One can apply for an FPO using the same process as an IPO by submitting an application under the Retail Individual Investors (“RII”) quota. Anyone who is at least 18 years old, possesses a PAN card, and has a Demat account is eligible to apply for an FPO. You can apply for an FPO through your stock broker’s app.

Conclusion

On a comparative scale FPOs are less riskier than IPOs however, it is important to note that all investments in the equity market are subject to market risks and returns are not guaranteed. Investors with a knack of predicting market trends and who are good at analysing publicly available data pertaining to the financial performance of a listed company can consider investing in FPOs.

However, novice investors with little experience in the stock market should ideally explore investment options with lower amounts of risk such as mutual funds.

Kuvera is a free direct mutual fund investing platform.

Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.