Written by: Sangeeta Lakhi
Many entrepreneurs dream of taking their companies to one that is successful and growing significantly. Part of that dream involves the company becoming public and getting its shares listed. Towards this, an Initial Public Offering (“IPO”) allows companies to raise significant capital that may otherwise not be available to unlisted companies. The IPO also extends a part of the ownership to the investors in return for their investments. Entrepreneurs develop strategies for their companies but often have limited financial resources to execute their strategies since existing shareholders may not be willing or may be unable to provide additional funds.
Another aspiration to take a company listed is the increased credibility that a company may have in the eyes of its customers, suppliers, partners, employees, lenders and the community at large. Listed companies garner more visibility than unlisted companies, as people perceive that being publicly listed is a criteria to being a successful company.
Once a company becomes a successful listed company, it may go back to the markets for additional funds to allow even further expansion. Many factors influence a company's ability to return to the markets for additional funds, such as, receptivity of stock markets, appetite of investors and success in delivering on strategy and expectations.
An overview of Follow-on Public Offer ("FPO")
Why do entrepreneurs return to the security markets with one more public offering or what is known as Follow-on Public Offer ("FPO")? An FPO is a subsequent offering of shares to the public, after an IPO. Companies aim to raise capital to finance debt or make growth acquisitions from the FPO proceeds. Another reason that companies promote an FPO is the absence of liquidity with banks and financial institutions or a need for substantial capital.
An FPO may be promoted either by the company itself, wherein the FPO proceeds are invested in the company against the issue of new shares or by existing shareholders, who desire to offload their shareholding in the company, called Offer-for-Sale or OFS, or by a combination of both, i.e. issue of new shares and OFS.
In an OFS, the FPO proceeds are not deposited with the company but delivered to the existing shareholders. In an FPO, the company issues new shares, thereby diluting the shareholding of the existing shareholders; whereas in an OFS, the shareholding of the existing promoters remain intact, other than those who partake in the OFS.
How does a Follow-on Public Offer (FPO) differ from an initial public offering (IPO)?
From a cautious investor's perspective, they may be comfortable investing in an FPO rather than an IPO, since FPO investors know the track record and assess the performance and stability of the issuer company.
In an IPO, although the investor invests in the company, based on its past performance, the pedigree of the promoter and the potential of the products, the risk of investing in an IPO is higher than that of investing in an FPO.
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), more specifically by the rules and regulations framed under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations).
SEBI is a statutory regulatory body entrusted with the responsibility to regulate the Indian capital markets. It monitors and regulates the securities market and protects the interests of the investors.
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.
What are some key legal considerations while opting for an FPO?
In addition to the above, a company must also obtain an in-principle approval to list the new shares, dematerialise its securities, ensure that its issued capital is fully paid-up and it has made verifiable arrangements to finance its project for which it proposes to promote the FPO.
Listed companies that desire to promote a public offer of debt securities must obtain a credit rating for the security, appoint a debenture trustee and create debenture redemption reserve.
If the existing shareholders of a company wish to offer their shares in an OFS, they may do so, so long as they have owned and held their shares for a minimum of 1 year prior to filing the offer document. If such shares were acquired pursuant to the conversion of convertible securities or depository receipts, the holding period of such securities or receipts is considered for the calculation.
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.
The Government of India is a good candidate for FPOs. It has successfully used the FPO route for disinvestment of its stake in certain listed public sector undertakings. Retail participation in such disinvestments has been encouraging and some issues have even been oversubscribed, take for example the FPOs of Power Grid Corporation, Engineers India and Power Finance Corporation Ltd amongst others.
There have been several discussions around Kudremukh Iron Ore Company and IDBI Bank also considering may use the FPO route for disinvestment of their shareholding. Likewise, Yes Bank is also contemplating an FPO to satiate its capital needs.
Should companies opt for an FPO?
The question of whether to opt for an FPO or private placement depends on the fund requirement of the company and the willingness of the promoters to dilute their shareholding and cede some control to the private equity investor. While private equity may be ideal, since a company must deal with one or two investors, the handicap is that all decisions must be approved by the investor. In an FPO, the promoters have the flexibility to operate the company as per past practices, albeit with the approval of the shareholders to material decisions.
With liquidity drying up with banks and financial institutions and private equity investors becoming cautious, entrepreneurs may prefer to use the FPO route to raise funds and realise their dreams to expand and grow their business. It will be a good opportunity for investors who have been tracking the company and wish to own a part of the company.
—Sangeeta Lakhi is Senior Partner at Rajani Associates. The views expressed are personal
First Published: IST