Introduction:

A Follow-on Public Offer (FPO) refers to a process wherein a company that is already publicly traded issues additional shares to investors. This mechanism allows a company to raise more capital after its initial public offering (IPO). FPOs are significant in the context of corporate finance and company law as they provide a means for companies to strengthen their capital base, facilitate expansion plans, and reduce debt.

Types of Follow-On Public Offers

Companies can issue various types of Follow-On Public Offerings (FPOs) to raise capital from the public. Here are some common types:

1. Dilutive FPO:

This occurs when a company issues additional shares to the public, which dilutes the ownership stake of existing shareholders. The number of outstanding shares increases, but the company can raise a large amount of capital quickly. This direct infusion of cash can positively impact the company's long-term outlook.

2. Non-Dilutive FPO:

Also known as secondary market offerings, in this type of FPO, the company offers existing shares held by insiders, founders, or early investors to the public without issuing new shares. This means the ownership stake of existing shareholders is not diluted, and the company's earnings per share (EPS) remains unchanged.

3. At-the-Market (ATM) Offering:

An ATM offering allows a company to raise capital as needed. The company can choose not to sell shares if the stock price is unsatisfactory. ATM offerings are typically less expensive and time-consuming than traditional public share offerings, requiring less regulatory paperwork and legal fees.

 

Importance of FPOs

  • Capital Raising:

The primary objective of an FPO is to raise additional capital. This capital can be used for various purposes, such as expansion of business operations, debt reduction, or funding new projects.

  • Liquidity Enhancement:

By issuing more shares, a company can increase the liquidity of its shares in the market. This makes it easier for investors to buy and sell shares, thus enhancing market confidence.

  • Debt Reduction:

Companies may use the proceeds from an FPO to reduce their debt burden. Lower debt levels can lead to improved credit ratings and reduce the company’s cost of borrowing.

  • Shareholder Base Expansion:

An FPO provides an opportunity to attract new investors, thus broadening the shareholder base. This can lead to a more diversified and stable investor base.

Legal Framework for FPOs in India

In India, FPOs are governed by various laws and regulations, primarily under the Companies Act, 2013, and the Securities and Exchange Board of India (SEBI) regulations.

Companies Act, 2013

The Companies Act, 2013 lays down the legal framework for the issue of shares by a company. Some of the key provisions related to FPOs include:

  • Section 23: (Public offer and private placement)

This section provides that a public company may issue securities to the public through a prospectus. An FPO falls under this provision.

  • Section 39: (Allotment of securities by company)

It mandates that all applications for securities must be accompanied by an application form and that the minimum subscription amount must be received before the company can allot shares.

  • Section 62: (Further issue of share capital)

This section deals with further issues of share capital and provides that a company may issue additional shares to its existing shareholders, employees, or to the public through a prospectus.

General Conditions for IPO & FPO

(Regulation 7 & 104 of SEBI (ICDR) Regulations, 2018)

  1. An issuer making an Initial Public Offer (IPO) or Further Public Offer (FPO) must ensure the following:
  • They must obtain in-principle approval for listing their securities from any Stock Exchange and select one as the designated stock exchange.
  • They must have an agreement with a depository for the dematerialisation of securities.
  • Promoters' securities should be in dematerialised form before filing the offer document.
  • Any existing partly paid-up equity shares must either be fully paid-up or forfeited.
  • Financial arrangements must be made for at least 75% of the stated means of finance (excluding the IPO amount or identifiable internal accruals) for the specified proposed project.

Fast Track FPO

The SEBI ICDR provides a fast track route for making a Further Public Offer (FPO). According to Regulation 155 of SEBI (ICDR) Regulations, 2018, if an issuer meets the following conditions, they are not required to file the draft offer document with SEBI or obtain SEBI's observations for the FPO:

  • The issuer's shares must have been listed on any stock exchange for the preceding three years.
  • The entire promoter group's holding must be in dematerialised form.
  • The average market capitalisation of the issuer's public shareholding must be at least Rs. 1000 crore.
  • The issuer should have an annualised trading turnover of at least 2% of the weighted average number of equity shares listed during the preceding six months.
  • The annualised delivery-based trading turnover of the equity shares should be at least 10% of the annualised trading turnover. The issuer must have complied with SEBI (LODR) Regulations, 2015, for the preceding three years.
  • At least 95% of investor complaints, if any, must be resolved by the end of the quarter preceding the reference date.
  • There should be no show-cause notices issued by SEBI against the issuer, its promoters, whole-time directors, or any settlement order compliance required.
  • The issuer's equity shares should not have been suspended from trading in the preceding three years.
  • There must be no conflict of interest between the lead manager(s) and the issuer or its group companies.
  • Restated financial statements are required if the financial statements disclosed in the offer documents contain any audit qualifications.

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Applicability of Minimum Promotor’s Contribution

  1. Are the shares frequently traded for the last 3 years?
  • Yes: Proceed to the next question.
  • No: MPC requirement is applicable.
  1. Have at least 98% of investor complaints in the previous quarter been redressed?
  • Yes: Proceed to the next question.
  • No: MPC requirement is applicable.
  1. Have the LODR Regulations been complied with in the last 3 years
  • Yes: Proceed to the next question.
  • No: MPC requirement is not applicable.
  1. Has the requirement of Board composition been complied with at the time of filing the offer document and disclosure made?
  • Yes: MPC requirement is applicable.
  • No: MPC requirement is not applicable.

In summary, the applicability of MPC depends on frequent trading of shares, redressal of investor complaints, compliance with LODR Regulations, and the board composition requirement.

SEBI Regulations

The Securities and Exchange Board of India (SEBI) has established specific regulations for the issuance of securities, including FPOs. The two key regulations in this context are the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations), and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations).

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations)

The ICDR Regulations provide a detailed framework for the issuance of securities by listed companies. Some key provisions related to FPOs are:

  1. Eligibility Requirements (Chapter III)
  • Regulation 6: Eligibility conditions for an issuer to make a public issue, rights issue or an FPO.
  • Track record of three years.
  • Net worth of at least ₹1 crore in each of the preceding three full years.
  • Regulation 29: Specific provisions related to an FPO including filing of the draft offer document with SEBI, disclosures required in the offer document, and other procedural requirements.
  1. Disclosures in Offer Document (Chapter IV)
  • Regulation 30 to 57: Detailed disclosure requirements including financial information, risk factors, litigations, management discussions, and analysis to ensure transparency and informed decision-making by investors.
  1. Pricing and Allotment (Chapter V)
  • Regulation 164 to 175: Pricing mechanisms, including fixed price issues and book-building methods, and the norms for allotment of securities.
  1. Promoters' Contribution and Lock-in (Chapter VI)
  • Regulation 112 to 115: Requirements regarding promoters' contribution and lock-in of shares post-issue to ensure long-term commitment of promoters to the business.

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations)

The LODR Regulations govern the ongoing disclosure and compliance requirements for listed companies. Some key provisions related to FPOs are:

  1. Disclosure Requirements (Regulation 30)
  • Regulation 30: Material events and information that need to be disclosed promptly to the stock exchanges to ensure transparency and fairness in the market.
  1. Corporate Governance (Chapter IV)
  • Regulation 17 to 27: Standards for corporate governance that listed companies must adhere to, including board composition, audit committee, and other governance structures.
  1. Financial Results (Regulation 33)
  • Regulation 33: Quarterly and annual financial results must be prepared and disclosed following specified timelines and formats to maintain consistency and transparency.
  1. Provisions related to subsidiaries (Regulation 24)
  • Regulation 24: Ensuring that significant activities of subsidiaries are disclosed and monitored by the parent company to protect shareholders' interests.

Process of an FPO

The process of conducting an FPO involves several steps:

  • Board Approval:

The company’s board of directors must approve the proposal for an FPO. This includes determining the size of the issue, pricing, and other relevant details.

  • Shareholder Approval:

Depending on the company’s articles of association and regulatory requirements, shareholder approval may be required. This is typically obtained through a general meeting.

  • Filing of Offer Document:

The company must file the draft offer document with SEBI and the stock exchanges. SEBI reviews the document to ensure compliance with regulatory requirements.

  • Marketing the Issue:

The company undertakes marketing activities to generate interest among potential investors. This may include roadshows, investor presentations, and advertisements.

  • Pricing and Allocation:

The final price of the shares is determined through a book-building process or fixed price offer. Shares are then allocated to investors based on their bids.

  • Listing and Trading:

Once the shares are allotted, they are listed on the stock exchanges, and trading begins. The company must ensure compliance with post-issue regulatory requirements.

Conclusion

FPOs are a crucial mechanism for companies to raise additional capital and achieve their growth objectives. The regulatory framework in India, primarily under the Companies Act, 2013, and SEBI regulations, provides a robust structure for ensuring transparency, investor protection, and market stability. By adhering to these regulations, companies can effectively leverage FPOs to strengthen their financial position and create long-term value for their shareholders.

By thoroughly understanding the legal and regulatory framework governing FPOs, companies can successfully navigate the complexities of capital markets and achieve their strategic goals. This comprehensive overview serves as a guide for stakeholders, including company executives, legal professionals, and investors, to make informed decisions related to FPOs.