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 look at the different types of FPOs 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.
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?
A company needs an FPO when it wants to raise additional capital for business purposes such as expansion or debt repayment. Since the company is already a public limit company and has its shares trading on the stock exchanges, it launches a follow-on public offering to issue new shares and raise capital.
This is done by launching a dilutive FPO. Current shareholders and new investors can buy the FPO shares, and the money generated goes to the company.
FPO versus listed shares
Understanding what FPO is also includes understanding the difference between FPO and listed shares. When a company is private, it can only raise funds by issuing its shares to private investors. However, when it wants to raise funds from the general public, it launches an IPO (Initial Public Offering) to offer its shares for the first time. Once the IPO process is complete, the company becomes a public company with its shares listed on the stock exchanges. Here, the shares are called listed shares.
However, an FPO is a process that happens after the company has listed shares. Since the company has already raised funds through an IPO, it launches an FPO if it wants to raise additional capital as a public limited company. Companies offer new shares at a discounted price to investors in an FPO compared to their current price.
Differences between an IPO and FPO
Here is a detailed table explaining the differences between an IPO and FPO:
Particulars
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IPO
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FPO
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Meaning
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Issuance of shares for the first time.
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Issuance of shares after the IPO to raise additional capital.
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Price
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Fixed or variable within a price band.
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Depends on the market sentiment and the number of shares offered.
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Share capital
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Share capital increases after the IPO.
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The number of shares remains the same in non-dilutive FPO and increases in dilutive FPO.
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Value
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Shares are generally expensive.
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Shares are offered at a discount to the market price.
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Risk
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Riskier than an FPO.
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Comparatively less risky than an IPO.
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Company status
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IPOs are issued by an unlisted and private company.
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FPOs are issued by a public company.
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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 benefits of an FPO for companies:
- Capital raising: One of the primary reasons companies launch an FPO is to raise additional capital. These funds can be used to pay off debt or invest in expansion projects.
- Increased liquidity: An FPO increases the liquidity of the company's shares by increasing the number of shares available in the market. This makes it easier for investors to buy and sell shares in the company.
- Diversification: An FPO allows companies to diversify their investor base by attracting new investors. This can also lead to a more diversified equity base for the company.
- Improved market reputation: A successful FPO can enhance a company's market reputation, demonstrating investor confidence in its growth potential and financial stability.
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
