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

A Follow-on Public Offering (FPO) is an essential fundraising tool for companies that are already listed on the stock exchange. It allows such companies to raise additional capital by issuing new shares to the public or selling existing shares held by promoters or major stakeholders. FPOs are often used for business expansion, debt reduction, or to meet other corporate requirements. This article delves into everything you need to know about FPOs, including their types, benefits, risks, and key processes.

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

A Follow-on Public Offering (FPO) refers to the issuance of additional shares by a company that has already undergone an Initial Public Offering (IPO) and is listed on the stock exchange. While an IPO helps a company enter the public markets for the first time, an FPO allows a company to raise further funds from public investors.

FPOs are primarily used to:

• Expand business operations.
• Reduce or refinance existing debt.
• Improve the company’s financial stability.

2. Types of Follow-on Public Offerings

FPOs can be broadly classified into two categories:

A. Dilutive FPO

In a dilutive FPO, the company issues fresh shares to the public. This increases the total number of outstanding shares, which can dilute the ownership percentage of existing shareholders. The funds raised through a dilutive FPO are used for growth initiatives, operational needs, or debt repayment.

For example, if a company had 1,000 outstanding shares and issued 200 more shares through an FPO, existing shareholders’ ownership would be diluted since there are now 1,200 shares in total.

B. Non-Dilutive FPO

In a non-dilutive FPO, no new shares are issued. Instead, existing shareholders—usually company promoters, large investors, or institutional holders—sell their shares to the public. Since no new shares are created, the ownership structure remains unchanged. The proceeds from the sale go to the selling shareholders, not the company.

3. FPO vs IPO: Key Differences

4. Why Do Companies Opt for an FPO?

Companies may launch an FPO for a variety of reasons, including:

• Business Expansion: To fund new projects, acquisitions, or infrastructure.
• Debt Repayment: To reduce debt and improve the balance sheet.
• Compliance with Regulations: To meet the minimum public shareholding requirements as mandated by regulatory bodies.
• Improving Liquidity: To increase the number of shares in the market, improving trading activity.

5. The Process of a Follow-on Public Offering

The FPO process involves multiple steps, ensuring transparency and compliance with market regulations:

1. Board Approval: The company’s board of directors approves the FPO proposal.
2. Draft Prospectus: A draft red herring prospectus (DRHP) is prepared, which outlines the purpose of the FPO, financial details, and risk factors.
3. Regulatory Approval: The prospectus is submitted to regulatory authorities (e.g., SEBI in India) for review and approval.
4. Price Band Announcement: The company announces a price range for the shares being offered.
5. Book-Building or Fixed Pricing: Investors bid for shares (book-building) or purchase at a fixed price set by the company.
6. Subscription Period: The FPO opens for public subscription, during which investors can apply for shares.
7. Allotment of Shares: Shares are allocated to investors based on demand and category (retail, institutional, etc.).
8. Listing on Stock Exchange: Post allotment, the newly issued shares are listed and traded on the stock exchange.

6. Pricing of FPO Shares

The pricing of FPO shares depends on the company’s market performance and investor demand. Companies can adopt one of the following methods:

• Fixed Price Offering: The price is predetermined and announced before the issue opens.
• Book-Building Process: Investors place bids within a specified price range, and the final price is determined based on demand.

To attract retail investors, companies often offer shares at a discount to the current market price.

7. Benefits of Investing in an FPO

FPOs offer several advantages to investors, including:

• Lower Risk: Companies issuing FPOs are already listed, offering greater transparency and a proven track record.
• Discounted Shares: Investors can often purchase shares at a discounted price, providing an opportunity for better returns.
• Growth Potential: The funds raised through an FPO are often used for expansion, which can boost the company’s future performance.
• Increased Liquidity: More shares in the market improve trading activity and liquidity.

8. Risks Associated with FPOs

While FPOs can be beneficial, they are not free from risks:

• Dilution of Ownership: In a dilutive FPO, existing shareholders’ ownership is reduced due to the increase in the total number of shares.
• Stock Price Volatility: FPO announcements can impact stock prices in the short term due to investor speculation.
• Uncertain Utilization of Funds: If the raised funds are not used efficiently, it can negatively affect the company’s growth and shareholder value.

9. How to Apply for an FPO?

Investing in an FPO is simple and can be done online through your trading and Demat account:

1. Log in to Your Account: Access your stockbroker’s portal or trading app.
2. Choose the FPO: Select the company offering the FPO.
3. Place Your Bid: Enter the desired number of shares and bid price.
4. Fund the Bid: Use the ASBA (Application Supported by Blocked Amount) facility to block the required funds in your bank account.
5. Allotment and Listing: If shares are allotted, they will reflect in your Demat account and can be traded post-listing.

Disclaimer

Investing in Follow-on Public Offerings (FPOs) involves market risks, including the potential loss of principal. This article is for informational purposes only and does not constitute financial advice. Investors are advised to conduct thorough research and consult with a financial advisor before making investment decisions. Past performance is not indicative of future results.