On February 1, Adani Group announced the withdrawal of its fully subscribed FPO. Calling it a morally correct step, Gautam Adani said in a statement that the board took the decision considering the volatility of the market. The money that got locked in the subscribers’ accounts will be released soon via escrow. In the statement, there were several technical terms that a layman may not be familiar with. Let’s understand these terms to make it easier to learn about what has been happening in the market.
What is FPO and how it works?
In an FPO (Follow-on public offering), a publicly traded business can issue additional shares of stock to gain further funding. An underwriting firm is usually involved with setting the price and guaranteeing that there is adequate demand for the new shares. Such offerings are typically done to enlarge operations, make acquisitions, or repay debt. Through these offerings, investors become part owners of the company and may reap advantages from possible future growth possibilities.
A Follow-on Public Offering (FPO) can either be dilutive or non-dilutive. Dilutive FPOs generally result in a decrease in the ownership percentage of existing shareholders. Since the new shares issued in the offering add to the total number of outstanding shares, this spreads out the value among more individual shares. On the other hand, non-dilutive FPOs commonly take the form of convertible bonds or preferred stock issuance that allows investors to convert their investments into common stock at a later date. While dilutive FPOs are simpler for companies to use when raising capital, non-dilutive offerings can be beneficial for avoiding dilution and providing greater returns over time.
The process of a Follow-on Public Offering starts with the initial preparation that involves the company hiring an investment bank to act as an underwriter and develop the offering price and number of shares to be sold. Following that, a registration statement including pertinent information is submitted to the Securities and Exchange Board. Afterward, a roadshow is conducted by the company and underwriter to present financials, business plans, and growth prospects to potential investors. Following this, it is up to the underwriter to set the final offering price based on demand from investors and allocate shares accordingly. Finally, the closing and settlement consist of issuing shares and receiving proceeds from the offering. With this money, companies may finance operations, pay off debt or invest in growth opportunities. The success of each FPO depends on market conditions, financial performance/growth prospects, and terms of the offering.
What is an FPO subscription?
The Follow-on Public Offering (FPO) offers investors the chance to purchase shares in a company that has already gone public. Typically, such shares will be sold at a discount to the prevailing market price. To subscribe, an application form must be completed and payment provided. After this, the allotment process begins, deciding how many shares each investor can receive based on the total number available and applications made. When done, those shares are credited to the subscriber’s account and they become shareholders in the enterprise.
Why funds are locked in the FPO subscription account?
A Follow-on Public Offering (FPO) requires investors to pay for the shares in advance. As a result, the money is locked in the FPO subscription account. The reason for this is to ensure that the company has enough funds to operate. These funds usually remain in an escrow account till the FPO is completed. In this way, while the company may access funds when required, the investors have a sense of security that their money is safe. The escrow account ensures that funds are only released after the FPO is completed or canceled.
What is escrow and how it works?
Escrow is a third-party service used in transactions to hold funds or assets until certain conditions are met. Until all parties involved in the transaction have fulfilled their obligations, escrow provides a secure and neutral holding place for valuable items.
Using an escrow service during a transaction involves the buyer and seller agreeing to use this third party to hold funds or assets until all terms are met. They will provide information to the escrow company and agree on the conditions of the deal. The buyer then deposits their money into the account, which is verified by the assurer, and then the seller delivers their goods or services.
Upon confirmation from the buyer that they have received what they expected, both parties are deemed to have completed their obligations, at which time the funds are then released to the vendor. Once this occurs, the process is finalized and considered finished. Escrow can serve as a secure means of protection for buyers and sellers in many exchanges including real estate purchases, online auctions, and other high-value transactions.
How are escrow services used for a refund in case of a canceled FPO?
When an FPO is canceled, the company can use escrow to refund the subscription amount to the investors who have already paid for the shares. In such cases, the escrow company will hold the funds until the time FPO is completed or canceled.
Using escrow for a refund of the subscription ensures that the investors are protected in the transaction. The escrow companies act as intermediaries and hold the funds until the time funds are returned to the investors.
