All Things to Know About Follow-on Public Offering (FPO)

A Follow-on Public Offering (FPO) is a process by which a publicly listed company issues additional shares to investors after its initial public offering (IPO). This fundraising mechanism allows companies to raise capital for various needs, such as expansion, debt repayment, or other corporate purposes. FPOs can significantly impact a company’s stock price and shareholder dynamics, making it essential for investors to understand how they work.

1. What Is a Follow-on Public Offering (FPO)?

An FPO is a public issue of shares by a company that is already listed on a stock exchange. It serves as a secondary offering to raise additional capital. Unlike an IPO, which introduces a company to the public market, an FPO involves companies that have already undergone the IPO process.

FPOs can be categorized into two types:

1. Dilutive FPO: New shares are issued, which increases the total share count, leading to a dilution of existing shareholders’ stakes.
2. Non-Dilutive FPO: Existing shareholders or promoters sell their shares, and the proceeds go to these shareholders rather than the company.

2. Why Do Companies Opt for an FPO?

Companies choose FPOs for several strategic reasons:

• Capital for Expansion: To fund new projects, acquisitions, or infrastructure developments.
• Debt Reduction: To repay outstanding loans and improve the company’s financial health.
• Increase Liquidity: To make shares more accessible to the public, improving market participation.
• Meet Regulatory Requirements: To comply with regulatory norms, such as minimum public shareholding requirements.

3. How Does an FPO Differ from an IPO?

While both IPOs and FPOs involve raising capital through public markets, there are key differences:

4. What Are the Steps in an FPO Process?

1. Board Approval: The company’s board approves the FPO and decides the objectives and structure.
2. Draft Prospectus: The company files a draft red herring prospectus (DRHP) with the regulatory authority, providing detailed financial and operational information.
3. Regulatory Clearance: The prospectus is reviewed, and necessary approvals are obtained.
4. Pricing and Subscription: The company sets the FPO price band, and investors subscribe during the offer period.
5. Allocation of Shares: Shares are allocated to investors, and the company receives the proceeds from the issue.

5. How Is FPO Pricing Determined?

The pricing of shares in an FPO is typically based on the company’s current stock market price. There are two common pricing methods:

• Fixed Price Offering: Shares are offered at a predetermined price.
• Book Building Process: Investors bid within a specified price range, and the final price is determined based on demand.

Companies often offer a discount on the FPO price to encourage participation from retail investors.

6. What Are the Risks and Rewards of Investing in an FPO?

Risks

• Dilution of Ownership: A dilutive FPO increases the total number of shares, potentially reducing earnings per share (EPS) and diluting existing shareholders’ stake.
• Market Volatility: Stock prices may fluctuate during and after the FPO, leading to potential losses.
• Overvaluation: Shares might be overpriced, reducing the potential for gains.

Rewards

• Growth Potential: FPO proceeds are often used for expansion, which can drive future growth.
• Discounted Pricing: Retail investors may benefit from lower-than-market prices during the FPO.
• Improved Liquidity: Increased share float can lead to better price discovery and easier trading.

7. How Does an FPO Affect the Stock Price?

FPOs can influence stock prices in various ways:

• Short-Term Impact: Stock prices might decline due to the dilution of ownership or if the market perceives the offering as a sign of financial distress.
• Long-Term Impact: If the funds raised are used effectively, the company’s performance may improve, leading to higher stock prices.

8. Who Can Participate in an FPO?

FPOs are open to multiple categories of investors, including:

• Retail Investors: Individual investors often get a discount on the issue price.
• Institutional Investors: Large financial institutions and mutual funds play a significant role in determining the success of an FPO.
• Foreign Institutional Investors (FIIs): Often participate in FPOs to diversify their portfolios.

9. How Can Retail Investors Apply for an FPO?

Retail investors can apply for an FPO through their brokerage account or trading platform:

1. Log In: Access your trading account.
2. Navigate to the FPO Section: Select the ongoing FPO you wish to invest in.
3. Place Your Bid: Enter the number of shares and bid amount within the price range.
4. Payment: Use the ASBA (Application Supported by Blocked Amount) method, which blocks the bid amount in your bank account.
5. Receive Allotment: If shares are allotted, they will be credited to your Demat account.

10. What Should Investors Look for Before Investing in an FPO?

Before participating in an FPO, investors should consider:

• Company’s Financial Health: Analyze financial statements, revenue growth, and profitability.
• Purpose of the FPO: Understand how the proceeds will be utilized.
• Market Sentiment: Gauge the market’s response to the offering.
• Valuation: Compare the FPO price with the current market price and industry peers.

Disclaimer

Investing in Follow-on Public Offerings (FPOs) carries risks, including market volatility and dilution of existing holdings. This article is for informational purposes only and does not constitute financial advice. Investors are advised to perform due diligence and consult a financial advisor before making investment decisions. Past performance is not indicative of future results.