Rights Issue vs Follow-On Public Offer: What Investors Should Know
Companies need money to grow, and the stock market provides multiple ways for them to raise capital. Two common methods you will come across are Rights Issues and Follow-On Public Offers (FPOs). While both involve issuing new shares, they work quite differently and have different implications for investors.
Let us understand both in simple terms so you can make informed decisions when your company announces one.
What Is a Rights Issue?
A rights issue is when a company offers its existing shareholders the right to buy additional shares at a discounted price. This is proportional to the shares they already hold.
For example, if a company announces a 1:5 rights issue at Rs 200 per share (when the market price is Rs 300), it means for every 5 shares you own, you have the right to buy 1 additional share at Rs 200. If you own 500 shares, you can buy up to 100 new shares at the discounted price.
Key Features of a Rights Issue
- Exclusive to existing shareholders: Only people who already own shares of the company on the record date can participate.
- Discounted price: The issue price is usually lower than the current market price, making it attractive.
- Right, not obligation: You are not forced to buy. You can choose to exercise your rights, let them lapse, or in some cases, sell the rights to someone else through the stock exchange.
- Proportional allocation: Your allocation is based on how many shares you currently hold, maintaining your ownership percentage if you fully participate.
What Happens If You Do Not Subscribe?
If you choose not to participate in the rights issue, your ownership percentage in the company will get diluted. More shares will be outstanding, but your holdings remain the same, meaning you own a smaller slice of the pie.
What Is a Follow-On Public Offer (FPO)?
A Follow-On Public Offer is when an already-listed company issues new shares to the general public. Unlike a rights issue, an FPO is open to everyone, not just existing shareholders.
Types of FPOs
- Dilutive FPO: The company issues brand new shares, which increases the total number of shares outstanding. This dilutes existing shareholders’ ownership. The money raised goes to the company for expansion, debt reduction, or other purposes.
- Non-Dilutive FPO (Offer for Sale): Existing shareholders, usually promoters or early investors, sell their shares to the public. No new shares are created, so there is no dilution. The company does not receive any money; the selling shareholders do.
Key Features of an FPO
- Open to all investors: Anyone can apply, not just existing shareholders.
- Usually at or near market price: Unlike rights issues, FPOs may not offer a significant discount.
- SEBI regulated: FPOs go through a detailed regulatory process, including filing a prospectus with SEBI.
- Can be applied through your broker or bank: Similar to an IPO application process.
Rights Issue vs FPO: Key Differences
| Feature | Rights Issue | FPO |
|---|---|---|
| Eligibility | Existing shareholders only | Open to all investors |
| Pricing | Usually at a discount | At or near market price |
| Purpose | Raise capital for the company | Raise capital or allow exit for existing investors |
| Dilution | Can be avoided by subscribing | Dilutes existing shareholders (in dilutive FPO) |
| Regulatory process | Relatively simpler | More extensive, similar to IPO |
What Should You Do as an Investor?
When Your Company Announces a Rights Issue
First, understand why the company is raising money. If it is for expansion, debt reduction, or a strategic acquisition, it could be positive. If the company is raising money to survive or cover losses, that is a red flag.
If you believe in the company’s long-term prospects and the rights issue price is attractive, subscribing makes sense. It lets you increase your holding at a discount while maintaining your ownership percentage.
When Considering an FPO
Evaluate an FPO like you would any stock purchase. Look at the company’s fundamentals, growth prospects, and the price being offered. In a non-dilutive FPO, pay attention to why existing shareholders are selling. If promoters are reducing their stake significantly, ask what they know that you do not.
Recent Examples from India
Several prominent Indian companies have used rights issues and FPOs to raise capital in recent years. Reliance Industries raised over Rs 53,000 crore through a rights issue in 2020. Yes Bank also used a rights issue to shore up its capital after a restructuring. On the FPO side, government disinvestments often take the form of offers for sale in companies like Coal India, ONGC, and BHEL.
These examples show that both methods are widely used and serve different purposes depending on the company’s needs.
Understanding corporate actions like rights issues and FPOs helps you make better investment decisions. Bachatt helps India’s self-employed professionals invest with clarity and confidence. Download Bachatt today and take charge of your financial future.
