This article has been written by Nuthanaganti Tejaswini pursuing Diploma in General Corporate Practice: Transactions, Governance and Disputes and has been edited by Oishika Banerji (Team Lawsikho). 

This article has been published by Sneha Mahawar.​​ 

Introduction

As we daily see in the news that one company is issuing shares to the public or some X company is coming to an IPO or FPO, for a layman initially it is a bit unknown concept, and therefore gets confused among initial public offering (IPO), follow-on public offering (FPO) and dilutive shares. To begin with, both the IPO and FPO are purposefully the same as both offer shares to the public in return for the money. However, an IPO comes at the initial stage of raising funds from the public in the primary market, whereas FPO is a subsequent stage of raising funds from the public in the secondary market. For instance, ABC Company needs funds largely, for its internal operations, so it can offer the shares to the general public and raise funds for a certain amount, later, after 2 to 3 years of issuing an IPO if the company ABC is again in need of funds it can issue further shares to the public in the form of follow-on public offering or FPO for the lesser amount of market price. Here, one needs to understand that FPO cannot be issued without going for an IPO, as the name suggests itself. This article is dedicated towards making its readers understand the difference between the two types of offerings by providing detailed discussion in regards to both. 

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What is an IPO

Offering the securities of a public company to the general public for raising funds, for the first time, is called an IPO which is an initial public offering. In IPO, the shares can be issued to the general public and that includes private bodies and institutions. An IPO is the greatest possibility for a company to grow higher and expand larger, it also offers great returns to the existing shareholders as their exit rights, and it provides a great opportunity for the public in contributing capital to such a company by taking high returns soon or future. It is a fresh issue of shares.

Basic eligibility for issuing an IPO

The basic eligibility for issuing an IPO is the company must be a public company and not a private company, as per Section 2(68) of the Companies Act, 2013. A private company cannot transfer its shares to the general public as the shares are held only by private investors, though if a public company wants to raise funds from the general public, for reducing debts, internal operations, or for any other reason, can seek investment from the public only after converting such company into a public company. The number of shares and their price in an IPO shall be decided based on the company’s valuation. In an IPO, the company shall issue the said shares only in the primary market and the already issued shares can trade in the secondary market. Thus, the ultimate purpose and goal of an IPO is to bring huge investment support from the public by selling their shares and promising good monetary benefits in return.

Which entities are not eligible to make an IPO

By virtue of Regulation 5 (1) and (2) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, any of the company’s promoters, promoters’ group, or directors are fugitive offenders, willful defaulters, debarred by SEBI, or the promoters or directors of the issuer company are the promoters, promoters’ group or directors of any other company which is debarred by the SEBI, are not eligible to make an IPO or access investment from the public.

Eligibility Criteria for Public Issue

There are separate eligibility criteria for both the listed company and the unlisted company (a listed company means a company’s securities are listed in any recognized stock exchange, sec 2[52] of the Companies Act, 2013, for unlisted it is vice-versa), and the eligibility norms for both the companies are based on the criteria of which stock exchange the issuer company is listed. Thus, when a company is coming up with an IPO it must abide by both SEBI regulations and recognized Stock Exchange criteria in which the company got listed.

Eligibility norms by SEBI

To come up with an IPO a company must have (regulation 6 of the SEBI [issue of capital and disclosure requirements] Regulations, 2018)

Þ   Net tangible assets of a minimum of 3 crore rupees in three preceding years.

Þ Average operating profit shall be a minimum of 15 crore rupees in three preceding years.

Þ   Net worth shall be a minimum of 1 crore rupees in three preceding years.

Þ  In case the company changed its name, then 15% of the revenue for one preceding year shall be earned from the goodwill of its new name.

Þ  If any company is not fulfilled all the above conditions can still make and eligible for an IPO, if the issue is made through the book-building process and 75% of the offer is allotted to qualified institutional buyers.

Eligibility Norms by National Stock Exchange

Þ   The paid-up equity capital shall be a minimum of 10 crores (post issue) and its capitalization shall be a minimum of 25 crores.

Þ  No insolvency proceedings against the company under the Insolvency and Bankruptcy Code, 2016, and there is no winding-up petition by National Company Law Tribunal (NCLT) against the company.

Þ  The company shall have a positive net worth.

Þ  The promoters of the issuing company shall have 3 years of experience in the same line of business and hold a minimum of 20% of post-issue share capital.

Þ  The company shall submit all the annual reports to the NSE.

Eligibility norms by the Bombay Stock Exchange

Þ   The paid-up equity capital shall be a minimum of 10 crores (post-issue).

Þ   The market capitalization of the company shall be a minimum of 25 crores.

Þ   The minimum IPO or issue size must be 10 crores.

Steps involved in the IPO

  1. The company shall appoint investment bankers or underwriters as experts and make sure they act as an intermediary towards the Issue.
  2. An issuer company will file an offer document, which means a Red Herring Prospectus, in a prescribed format with the Securities Exchange Board of India (SEBI), Registrar of companies, and Stock Exchanges for listing on the stock exchanges.
  3. The regulatory authorities will suggest an observation, if needed, over the application to the applicant or issuer company.
  4. The issuer will acknowledge the observations and make necessary changes, later the company fixes the date for the IPO.
  5. Two weeks before the issuing date, the issuer makes an advertisement in the market and lets the general public know about the public issue and attracts potential investors.
  6. Furthermore, the pricing for the securities will take place either by fixed price or book building process (which is also called a bidding process) and fix the rate. Besides, the issuer allots shares to all the investors and this happens in the primary market.
  7. Later, the issued shares can be traded in the secondary market which means in the stock exchanges where the issuer company got listed.
  8. Issuing securities to the public by a company involves great coordination, demands, and efforts by both internal and external agencies and intermediaries. The involved agencies are merchant bankers, brokers, underwriters, legal advisors, registrar, transfer agents, Reserve Bank of India (RBI), Securities Exchange Board of India (Sebi), and other statutory agencies.

What is FPO

If any company raises additional funds from the general public, after a few years of its initial public offering, the same is known as a Follow-on Public Offer. No company is confined to raising capital from the public only once, they can issue new shares or securities of the company more than once and raise investment from them, as every business needs frequent investments to execute new ideas and make the business profitable for surviving in the market. The FPO can be possible only if that issuer has already gone through the IPO and the FPO is more cost-efficient than the IPO as there are more compliances for the first stage than the second stage. In simple terms, it is also called secondary offerings. 

Many people may think that investing in an FPO is better than investing in an IPO. The reason being a company’s profitability statistics may change at any time, the market may fluctuate, and the initial success is always uncertain to sustain, and if a company is going for an FPO being it already established in the market for more time it can bring more profits and all the financial information like the track record of the company will be available in the public domain. lastly, an FPO offers its shares lesser price than the market price, thus the investors already be in the profit, however, not every FPO will be successful, some FPOs may fail due to various factors like potential and profitability of the company, market trend, investor estimations, etc.

How shares are issued in FPO

The FPO also has a similar procedure just like an IPO. However, the price per share in the IPO depends on the company’s performance, potential, and track record. Also, a company in an IPO strives to get a good price rate for its shares. Whereas, it is not a similar situation in an FPO as the issuer shares are already present and trading in the market so the pricing will be very much visible to the general public and there is no special method involved in the FPO to calculate the price per share. 

Though issuing shares will be a different process in FPO compared to IPO, in FPO there are two types called dilutive shares and non-dilutive Shares. Uncomplicatedly the dilutive shares are the number of shares of the company that got increased without changing the company’s total valuation and issuing those shares to the public, in this type the per-share value will be decreased and suffice the company’s valuation.

For instance, company X is going through an IPO in 2019 and is in need of additional funds to clear its debts, thus, it came to an FPO and decided to issue shares in dilutive form. Company X has 10 shares in total with a valuation of 1000 rupees which means 100 rupees for 1 share and it increases the number of shares to 20 to issue 10 new shares to the public. So, the valuation of company X will be unchanged (1000 rupees) but the per-share value will be decreased to 50 per share.

The non-dilutive type is when the existing shareholders offer some of their owned shares to the public without introducing new shares in the company. When it happens the amount of that shares will be taken by the shareholders who gave their shares but not to the company’s account. Mostly this form doesn’t bring any difference in the profits of the company but simply changes the shareholder’s pattern.

Conclusion

An IPO can only issue new shares but an FPO can either offer old shares or new shares. Share capital in FPO can increase only in the dilutive share method. Always in FPO, the shares will be offered at a discounted price over the market price, to attract the investors, so that the investors can get initial profit. Apart from the risk involved in both public issues, the FPO is a bit more risk-free than the IPO as it is already listed and trading in the market so it can be easier to estimate the company’s financial performance.

References 

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