FPO set for comeback as fund raising tool with Yes Bank's mega offering

The last successful FPO to hit the domestic market was in 2014 by Engineers India. Apart from that, only three others have successfully launched an FPO

Follow-on public offerings (FPOs), an equity capital raising instrument for listed companies, had gone out of favour. The last successful FPO, by Engineers India, hit the domestic market in 2014. Apart from the state-owned firm, only three others have successfully launched FPOs — the process is strikingly similar to an initial public offering (IPO).

A lengthy approval process and the risk of the issue getting undersubscribed, if the secondary markets see volatility, are some of the reasons why firms have stayed clear of FPOs. The qualified institutional placement (QIP) has been the go-to instrument, given its fast-track nature.

However, the FPO lull is set to end with the recently-resurrected YES Bank planning to launch a mega Rs 15,000-crore offering next week. So why is the lender opting for an FPO?

Investment bankers say, given the bank’s predicament, it had little choice even though it has board approval to raise funds through multiple routes. High dilution, complex shareholding, and compulsion to issue shares at a deep discount to the current market rate mean most fundraising avenues are shut for the bank, they add.

 

 

Shares of YES Bank ended at Rs 26.7 on Thursday, valuing the lender at Rs 33,500 crore. To raise Rs 15,000 crore in equity capital will mean huge dilution of current equity base. More so, as some reports suggests that the shares will have to be issued at half the current market rate to entice investors.

This rules out a QIP, which has to be priced around the prevailing market rate. Markets regulator Securities and Exchange Board of India (Sebi) recently eased the pricing formula for QIPs. However, it still doesn’t move the needle much. FPOs, on the other hand, allow freedom of pricing.

Rights offering is another instrument that allows a company to freely price its shares. However, a rights issue requires existing shareholders of YES Bank to pump in more money. For instance, State Bank of India (SBI), which currently holds a 48.2 per cent stake, will have to cough up nearly Rs 7,500 crore. The bank has board approval to invest up to Rs 1,760 crore.

In March, the government announced a restructuring plan for YES Bank, under which SBI pumped in Rs 6,050, ICICI Bank and HDFC invested Rs 1,000 crore each. Meanwhile, five others invested between Rs 250 crore and Rs 600 crore. Given the recent investments, existing shareholders were non-committal on investing more, said a person in the know.

Investment banking sources say another reason for the FPO is to widen the investor base by encouraging retail, high networth individuals, and institutional investors to participate.

This is only possible through an FPO, as a QIP only allows institutional investors to participate.

Industry players say recent Sebi relaxation on fast-tracking FPOs and shortened listing timelines could once again increase the instrument’s appeal.

Last month, Sebi allowed companies to launch FPOs, of a certain size, without its review or feedback. Earlier, companies had to file an offer document and wait for weeks for Sebi’s feedback to launch the issue. Also, the time taken between closing an FPO to listing the new shares has been reduced from 12 days to just six days.