How a Follow-on Public Offer (FPO) works
Here is how an FPO works in the stock market:
1. Intermediaries appointment:
- The company appoints intermediaries such as investment banks and underwriters to assist with the FPO.
2. Offer document preparation:
- The company prepares an offer document containing detailed information about the FPO, including its size, lot size, and other relevant details.
- This document is filed with the Securities and Exchange Board of India (SEBI) for approval.
3. Pricing:
- Once SEBI approves the offer document, the company sets a price per share for the FPO.
- Investors apply for shares at this specified price.
4. Opening and closing:
- The company opens the FPO for a specific period during which investors can place their bids.
- Once the bidding period ends, the FPO is closed.
5. Allotment and listing:
- After the FPO application period, the company allocates shares to investors who applied.
- The shares are then listed on the stock exchanges.
Types of FPO
Now that you know what an FPO is in the share market, let’s explore the different types a company may announce. Follow-On Public Offerings are broadly categorised into the following three types:
1. Dilutive FPO
A dilutive FPO occurs when a company issues fresh equity shares as part of its Follow-On Public Offering. Due to the issue of additional shares, the total number of outstanding shares of the company increases. This, in turn, dilutes the ownership control of existing shareholders.
It also decreases the Earnings Per Share (EPS) and the current market price due to the addition of new shareholders. The proceeds from a dilutive FPO go entirely to the company and can be used to further its business objectives.
2. Non-dilutive FPO
A non-dilutive FPO, on the other hand, is when the promoters or other shareholders of the company sell their shares to external investors. Since no new shares are issued, such Follow-On Public Offerings don’t increase the total number of outstanding shares of the company.
This means there is no dilution of ownership or reduction in the EPS or share price. The proceeds from a non-dilutive FPO go entirely to the selling shareholders and not to the company itself.
3. At-the-market FPO
In an at-the-market FPO, companies issue new shares to the public at the current market price. If the share price witnesses a significant decline, the company can pull out of the public issue entirely. At-the-market FPOs are also known as controlled equity distributions since companies issue shares to interested investors directly through the secondary market.
How to apply for an FPO?
If you're considering investing in an FPO, here’s how you can go about it:
1. Understand the FPO: Begin by reviewing the company’s prospectus. This document outlines the company’s financial health, its business strategy, and the specific reasons for raising capital through the FPO.
2. Open a Demat account: To receive shares, you must have an active Demat account. If you don't already have one, you can open it with a registered Depository Participant (DP).
3. Choose the application method:
o Online method (ASBA): Use the Application Supported by Blocked Amount (ASBA) facility via your bank, which temporarily blocks the bid amount in your account until share allotment.
o Offline method: Collect the physical application form from a recognised intermediary such as NSE or BSE. Fill it in with accurate information and submit it with a cheque or demand draft.
4. Submit the application: Ensure the application is complete and submitted through the appropriate channel—either online or offline—along with payment details.
5. Allotment and listing: After the offer closes, the company allocates shares based on the subscription level. Allotment results and listing dates are usually communicated by the relevant stock exchanges.
Examples of FPOs
Over the course of the Indian stock market’s history, there have been several examples of Follow-On Public Offerings. Some of the most well-known and successful FPOs in the stock market include offerings by Power Finance Corporation (PFC) Limited, Tata Steel Limited, Power Grid Corporation of India, and ITI Limited.
That said, not all follow-on public issues end up being successful. There have been many instances where companies have failed to garner enough investor interest to go through with the issue. In other cases, the share prices of companies that opted for FPOs fell so steeply that they never recovered.
Why does a company need an FPO?
Companies opt for an FPO primarily to raise additional funds. This capital can be used for large-scale projects, business expansion, or repaying existing debts. In the case of a dilutive FPO, new shares are created and sold, increasing the number of outstanding shares in the market. While this may slightly reduce the value of existing shares, it enables the company to gather substantial funding to fuel its future growth.
Should you subscribe to an FPO?
FPOs generally carry lower risk compared to IPOs, as the company is already listed and has a proven track record. Often, FPO shares are priced at a discount to the market rate, making them attractive to investors who may choose to sell at a premium once listed. This makes FPOs a potentially profitable investment opportunity for both retail and institutional investors.
Benefits of Follow-On Public Offers (FPOs)
An FPO is an effective way for companies to ensure their operations run smoothly. Here are some of the advantages of this offering for companies:
- Capital raising: Helps companies generate funds for expansion, operations, or debt repayment.
- Reduced investor risk: Since the company is already publicly traded, investors can review its financial history and market performance.
- Increased liquidity: Issuing more shares boosts market liquidity and reduces price volatility.
- Debt reduction: Funds raised through an FPO can be used to clear existing loans, improving the company’s financial stability.
- Builds investor confidence: A well-executed FPO reflects sound business planning and can attract more investor interest.
- Access for retail investors: Existing and new investors get a chance to buy additional shares, often at a more favourable price.
Conclusion
With this, you must now be aware of what an FPO in the stock market is and the different types of FPOs possible. Follow-On Public Offerings are an excellent way for companies to gain access to capital for furthering their business objectives.
However, it can also be detrimental to their existing investors since the issue of more shares can dilute their ownership control and reduce the Earnings Per Share (EPS). So, a company that wants to issue an FPO in the capital market should do so only after deliberation and considering the various risks involved.
Related articles:
What are the Different Types of IPO
How is an IPO Valued
What is IPO Allotment Process
How to Check your IPO Allotment Status
