Supplementary Note – Rights Issue, Offer for Sale (OFS), and Follow-on Public Offer (FPO)
When a company is already listed on the stock exchange, its journey of raising capital does not end with the Initial Public Offering (IPO). In fact, listing is just the beginning. As businesses grow, expand, or restructure, they often need additional funds or may want to adjust their ownership structure. For this, companies use different mechanisms such as Rights Issue, Offer for Sale (OFS), and Follow-on Public Offer (FPO).
Understanding these options is important because they directly affect investors, share prices, and ownership patterns.
Overview of Capital Raising After Listing
Once a company becomes publicly traded, its shares are available in the secondary market where investors buy and sell among themselves. However, the company itself may still require funds for:
- Expansion of business operations
- Debt repayment
- Launching new projects
- Strengthening financial position
Additionally, promoters (original owners) may want to reduce their stake or comply with regulatory requirements such as minimum public shareholding.
To achieve these goals, companies use three key routes:
- Rights Issue
- Offer for Sale (OFS)
- Follow-on Public Offer (FPO)
Each of these serves a different purpose and has a unique structure.
Rights Issue – Raising Funds from Existing Shareholders
A Rights Issue is one of the most straightforward ways for a company to raise additional capital. In this method, the company offers new shares exclusively to its existing shareholders.
Key Concept
The company gives “rights” to current shareholders to buy additional shares in proportion to their existing holdings, usually at a price lower than the current market price.
For example:
- A 1:4 rights issue means you can buy 1 extra share for every 4 shares you already own
This discounted price acts as an incentive for shareholders to invest more in the company.
How It Works
- The company announces a rights issue with a specific ratio and price
- A record date is fixed to determine eligible shareholders
- Shareholders receive the option (not obligation) to subscribe
- They can:
- Buy additional shares
- Ignore the offer
- Sell their rights entitlement (if allowed)
Impact on Shareholders
Advantages:
- Opportunity to buy shares at a discount
- Maintain ownership percentage
- Support company growth
Disadvantages:
- Requires additional investment
- If ignored, ownership gets diluted
- Share price may adjust downward after the issue
Dilution Explained
When new shares are created, the total number of shares increases. If a shareholder does not participate, their percentage ownership decreases. This is known as dilution.
Example Insight
A well-known case is when a bank offered shares at a significant discount to its market price to raise funds from existing shareholders. While it helped the company raise capital quickly, shareholders had to decide whether to invest more or face dilution.
Offer for Sale (OFS) – Promoters Selling Their Stake
An Offer for Sale (OFS) is quite different from a rights issue. Here, the company itself does not raise money. Instead, the promoters sell their existing shares to the public.
Purpose of OFS
- Reduce promoter holding
- Meet regulatory requirements (like minimum public shareholding of 25%)
- Allow wider public participation
Key Characteristics
- No new shares are created
- Ownership shifts from promoters to public investors
- The company does not receive funds
- Funds go directly to the selling shareholders (promoters)
How OFS Works
- The company announces an OFS with a floor price
- Investors bid through a special window provided by stock exchanges
- Both retail and institutional investors can participate
- Shares are allocated based on bids
- Settlement typically happens quickly (usually T+1 day)
Pricing Mechanism
A floor price is set, and investors place bids at or above this price. The final allocation happens based on demand and the cut-off price.
Example Insight
A large public sector company once offered millions of shares through OFS at a fixed floor price. The issue was fully subscribed within a short time, showing strong investor interest.
Why OFS Is Popular
- Faster process compared to FPO
- Minimal regulatory complexity
- Efficient for promoters to reduce stake
- Quick liquidity for investors
Follow-on Public Offer (FPO) – Raising Fresh Capital from Public
A Follow-on Public Offer (FPO) is similar to an IPO but happens after the company is already listed.
Purpose of FPO
- Raise fresh capital from the public
- Fund expansion, acquisitions, or projects
- Strengthen financial position
Key Features
- New shares may be issued (leading to dilution)
- Open to all investors, not just existing shareholders
- Requires regulatory approval
Process of FPO
- The company appoints merchant bankers
- A Draft Red Herring Prospectus (DRHP) is prepared
- Approval is taken from SEBI
- A price band is announced
- Investors place bids through ASBA (Application Supported by Blocked Amount)
- Shares are allotted based on the cut-off price
- Newly issued shares are listed on the exchange
Pricing Strategy
The company sets a price band, and the final price is determined based on demand during the book-building process.
Example Insight
A government engineering company once launched an FPO with a price band slightly below the prevailing market price. The issue was oversubscribed multiple times, indicating strong investor confidence.
Why FPOs Are Less Common Today
- Longer and more complex process
- Higher regulatory requirements
- Slower execution compared to OFS
Since the introduction of OFS, many companies prefer it over FPO due to speed and simplicity.
Key Differences Between Rights Issue, OFS, and FPO
Purpose
- Rights Issue → Raise funds from existing shareholders
- OFS → Promoters sell their stake
- FPO → Raise fresh capital from the public
Share Creation
- Rights Issue → New shares created
- OFS → No new shares
- FPO → New shares may be created
Impact on Shareholding
- Rights Issue → Dilution if not subscribed
- OFS → Change in ownership, no dilution
- FPO → Dilution occurs
Participation
- Rights Issue → Only existing shareholders
- OFS → Open to all investors
- FPO → Open to all investors
Complexity and Speed
- Rights Issue → Moderate
- OFS → Fast and simple
- FPO → Complex and time-consuming
Final Thoughts
Rights Issue, OFS, and FPO are essential tools that companies use after listing to manage capital and ownership. While they may seem similar at first glance, their purposes and effects are quite different.
As an investor, understanding these mechanisms helps you:
- Make informed investment decisions
- Avoid unexpected dilution
- Take advantage of discounted opportunities
- Interpret market movements more accurately
Each method reflects a company’s strategic intent—whether it is raising fresh funds, redistributing ownership, or complying with regulations. Knowing the difference can give you a strong edge in the stock market journey.
Frequently Asked Questions (FAQs)
What is the main difference between Rights Issue, OFS, and FPO?
The main difference lies in purpose and participants. A Rights Issue is offered only to existing shareholders, an OFS allows promoters to sell their shares to the public, and an FPO is used by companies to raise fresh capital from all investors.
Does a Rights Issue dilute shareholding?
Yes, a Rights Issue can dilute shareholding if existing shareholders choose not to participate. Since new shares are created, the ownership percentage of non-participating shareholders decreases.
Is OFS beneficial for investors?
OFS can be beneficial as it often offers shares at a competitive or discounted price. It also provides an opportunity to invest in well-established companies. However, investors should always evaluate the fundamentals before investing.
Does the company receive money in an OFS?
No, the company does not receive funds in an OFS. The money goes directly to the promoters or existing shareholders who are selling their shares.
Why do companies prefer OFS over FPO?
Companies prefer OFS because it is faster, simpler, and involves fewer regulatory requirements compared to an FPO, which is more time-consuming and complex.
What is the role of SEBI in an FPO?
SEBI reviews and approves the Draft Red Herring Prospectus (DRHP) before the FPO can proceed. It ensures transparency and protects investor interests during the fund-raising process.
Can retail investors participate in OFS and FPO?
Yes, both retail and institutional investors can participate in OFS and FPO. However, a Rights Issue is generally limited to existing shareholders.
What is a price band in an FPO?
A price band is a range within which investors can place bids during an FPO. The final issue price is determined based on demand through the book-building process.
Which is better for investors: Rights Issue, OFS, or FPO?
There is no one-size-fits-all answer. A Rights Issue is beneficial for existing shareholders, OFS offers quick entry opportunities, and FPO allows participation in company growth. The best option depends on the investor’s goals and the company’s fundamentals.
What happens if a Rights Issue is not fully subscribed?
If a Rights Issue is not fully subscribed, the company may look for other investors or underwriters to purchase the remaining shares, depending on the structure of the issue.