FPO vs Right issue

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Prateek Biyani (Querist)
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12 June 2010 What is the difference between FPO And Right issue. What are formalities required to be complied with in both of them. When a listed public company offers its shares, it has to offer them first to its existing shareholders, then how FPO is possible ?

Aditya Maheshwari

Aditya Maheshwari (Expert)
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12 June 2010 FPO is open for public at large

Right issues is offer only for existing shareholders on a date.

Prateek Biyani

Prateek Biyani (Querist)
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14 June 2010 When a listed public company offers its shares, it has to offer them first to its existing shareholders, then how FPO is possible ?

CMA. CS. Sanjay Gupta

CMA. CS. Sanjay Gupta (Expert)
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08 August 2010 FPO: Further public offering:
Its much like an IPO, but its an IPO of an already listing company.

Concerns of FPO:
Usually people accuse the promoters/management of a company raising money through FPO of diluting the equity and not rewarding the shareholders adequately.
But if the management is good, then the reality is just the opposite.
an FPO usually happens when the stock price is at all time high. So in reality the FPO induces a stickiness in the price. (People rarely like to book losses, esp in a good company.)
Secondly the funds raised only enables the company to continue its exponential growth and hence benefiting the stake holders (both post and pre-fpo)
Thirdly the very fact an outsider is ready to pay the price for the share is a display of the company’s strong fundamentals.
So an FPO is actually a good thing for the minority stock holders.

Rights Issue:
Its is almost like a FPO i.e.:
1. Fresh equity of an already listing company is raised.
2. The fresh equity is always at a discount from the prevailing market rate (except a rare case where the promoter issues rights share instead of warrants to raise his holding)

However the only difference is that:
1. in the rights issue, only the existing share holders are allowed to subscribe. So the shareholding pattern does not get significantly altered.
2. The allotment would be in proportion to the existing shareholding pattern on the record date. So one does not have to worry about over subscription and hence no/low allotment.
3. The FPO is usually at the prevailing rates (or at a 5% discount) so that the existing shareholder’s interests do not get hurt. But the rights issue is usually a significant discount from the prevailing market rate to encourage subscription and also enable the existing share holders to save taxes by booking paper losses.
4. This discount in prices leads to a significant fall in the share price of the company (post record date)… (but now since the investors have more shares, their wealth does not alter) And this fall gives room for booking of paper losses and getting tax shields.
5. But this introduces a downside. If a company issues a rights issue (at a significant discount) then the existing share holders have to invest in the company, else they will suffer a significant dilution of stakes and capital losses.

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