IPO , FPO AND RIGHTS ISSUE
Presented By :
• Companies (Private and Public) need capital
either to increase their productivity or to increase
their market reach or to diversify or to purchase
latest modern equipments.
• Companies go in for IPO for funding and non
funding needs and if they have already gone for
IPO then they go for FPO.
• IPO: Initial Public Offering
• FPO: Further Public Offering
• The main thing a company does in either IPO or
FPO is to sell the shares or debentures to
investors.(the term investor here represents retail
investors, financial institutions, government, high
net worth individuals, banks etc).
Why IPOs and FPOs?
For Funding Needs
•Funding Capital Requirements for Organisational Growth
•Expansion through Projects
•Funding Global Requirements
•Funding Joint Venture and Collaborations needs
•Funding Infrastructure Requirements, Marketing Initiatives and
•Financing Working Capital Requirements
•Funding General Corporate Purposes
•Investing in businesses through other companies
•Repaying debt to strengthen the Balance Sheet
•Meeting Issue Expenses
For Non-funding Needs
•Enhancing Corporate Stature
•Retention and incentive for Employees through stock
•Provide liquidity to the shareholders
• Primarily, issues made by an Indian company can
be classified as Public, Rights, Bonus and Private
Placement. While right issues by a listed company
and public issues involve a detailed
procedure, bonus issues and private placements
are relatively simpler.
• Public issue: When an issue / offer of securities is
made to new investors for becoming part of
shareholders’ family of the issuer it Is called a
public issue. Public issue can be further classified
into Initial public offer (IPO) and Further public
• Initial public offer (IPO): When an unlisted
company makes either a fresh issue of securities
or offers its existing securities for sale or both for
the first time to the public, it is called an IPO.
This paves way for listing and trading of the
issuer’s securities in the Stock Exchanges.
• IPO is a type of public offering where shares of
stock in a company are sold to the general public,
on a securities exchange, for the first time.
• Initial public offerings are used by companies to
raise expansion capital.
• Details of the proposed offering are disclosed to
potential purchasers in the form of a lengthy
document known as a prospectus
• Most companies undertake an IPO with the
assistance of an investment banking firm
acting in the capacity of an underwriter.
• Underwriters provide several services,
including help with correctly assessing the
value of shares (share price), and establishing
a public market for shares (initial sale)
• Further public offer (FPO) or Follow on offer:
When an already listed company makes either a
fresh issue of securities to the public or an offer
for sale to the public, it is called a FPO.
• A company uses FPO after it has gone through the
process of an IPO and decides to make more of its
shares available to the public or to raise capital to
expand or pay off debt.
• Merchant banking primarily involves financial
advice and services for large corporations and
• Merchant banker deals with management of
public Issues i.e. IPOs, FPOs, Right Issues, etc.
as Book Running Lead Manager.
Role of merchant banker
• The most familiar role of the merchant bank is stock underwriting.
• A large company that wishes to raise money from investors
through the stock market can hire a merchant bank to implement
and underwrite the process.
• The merchant bank determines the number of stocks to be
issued, the price at which the stock will be issued, and the timing
of the release of this new stock.
• The merchant bank files all the paperwork required with the
various market authorities, and is also frequently responsible for
marketing the new stock, though this may be a joint effort with the
company and managed by the merchant bank.
• For really large stock offerings, several merchant banks may work
together, with one being the lead underwriter.
• IPO Grading: IPO grading is the grade assigned
by a Credit Rating Agency registered with SEBI, to
the initial public offering (IPO) of equity shares or
other convertible securities. The grade represents a
relative assessment of the fundamentals of the IPO
in relation to the other listed equity securities.
Disclosure of “IPO Grades”, so obtained is
mandatory for companies coming out with an IPO.
Pricing in IPO and FPO
• During the IPO or FPO, the company offers its
shares to the public either at fixed price or offers a
price range, so that the investors can decide on the
right price. The method of offering shares by
providing a price range is called as book building
• FIXED PRICE ISSUE: - When the issuer at the
outset decides the issue price and mentions it in
the offer document, it is commonly known as
fixed price issue.
• BOOK BUILT ISSUE:-When the price of an issue
is discovered on the basis of demand received
from the prospective investors at various price
levels, it is called as book built issue.
Advantages of IPO
• The financial benefit in the form of raising
• Increased public awareness of the company
because IPOs often generate publicity by
making their products known to a new group
of potential customers.
• An increase in market share for the company.
• A company always needs funds for its operations
and for the fulfillment of its functions ,this need
securities are issued .
• And whenever company needs further capital
then it has to further issue those securities to its
existing shareholders .
• Just then it can issue them to general public. This
right to existing shareholders is called right issue.
Guidelines by SEBI
• Once a company has announced the right
issue then it cannot withdraw its proposal . It
has to issue the securities as per the
• Underwriting of right issue is
optional.Underwriting can be done on the
discretion of the company.
• Before right issue company has to take prior
approval of the registrar of the companies(ROC’s)
• Right issue must be kept open for atleast 30
• The amount of securities offered should not
exceed the amount specified in the prospectus or
letter of offer.
• Reservation is not allowed on rights shares.
• If a company does not receive minimum
subscription of 90% of the issue then entire
subscription will be refered within 42 days .
• If a company recieves over subscription of right
issue then the excess amount will be refunded to
the respective applicants .
• If a company delay the refund of over
subscription for more than 8 days after the
period of 42 days then it will be liable to pay
interest @15 % p.a.
Partly paid up shares must be made fully paid
• The ex-rights price should fall by the value of the right
attached to each share. The theoretical value of a right
(R) is given by:
• The theoretical value of a share ex-rights
• (X) is given by:
• Theoretically, a rights issue has no value to
• However, the announcement can have an impact on
shareholders’ wealth — information content, rights
issues are usually bad news, with information about
expected future cash flows.
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