Differences between FPO and Right Issue

K. ARAVIND

Recently, companies have been issuing rights issues that are attracting a lot of investors. The rights issue by Reliance Industries was a major event in the stock market. Investors need to understand the technical aspects of a rights issue.

Companies make IPOs (initial public offerings) to raise money through the stock market. The IPO is the process of selling a portion of the shares held by the promoters to investors. After the IPO, the company listed on the stock exchange can continue to sell shares to raise funds again. There are two ways to do this – FPO (Follow on Public Offer) and Right Issue. While all types of investors can buy shares through FPO, then the right issue is for existing shareholders of the company only.

Existing shareholders and non-shareholders have the opportunity to apply when the company that conducted the IPO conducts an FPO to sell more shares. The company will set a fixed price for the shares sold through the FPO. Such shares can be purchased by applying within a specified time frame like IPO.

Selling shares through an FPO, like an IPO, can reduce a company’s debt or expand its business. Shares of companies that normally announce FPOs tend to fall slightly. This is because the issue price of an FPO is often set at a lower price than the market price.

A right issue is when a listed company gives its existing shareholders the right to buy new shares. Right issue will be of the company’s shares will be at a slightly lower price than the current market price. The right issue will in proportion to the number of shares held by the shareholder. Selling shares through a rights issue helps to avoid the practice of raising funds through FPOs. Companies can seek right issue to avoid complicated processes in FPO. In addition, the issuance of new shares at a discount to existing shareholders will help them to remain loyal to the company.

The rights issue usually affects the market price of the stock as the rights issue will be usually at a lower price than what is in the market. Only those who hold shares before the due date are eligible for the right issue. Shareholders who do not apply for the rights issue may incur a loss as the share price may fluctuate according to the price of the rights issue. In order to avoid that, the right to the rights issue is given in shares. These shares will be held till the expiry of the rights issue. Those who are not interested in the rights issue can sell these shares within this period.