What is FPO?

An FPO is an abbreviated form of follow-up public offer. A listed company uses an FPO by the issuance of new shares with the purpose of raising further capital. This is unlike an initial public offering where, for the first time, a firm sells its shares to the general public. An FPO gives businesses the chance to raise more funds by issuing more shares. Because the company is already publicly traded, the regulatory procedures of an FPO are not as stringent as those for an IPO. However, the number of FPOs a company can conduct is not capped, although excessive offerings can dilute ownership and have a negative effect on shareholder value.

How does an FPO Work?

FPO means Follow-On Public Offer (FPO), which is an issue of additional shares by a company after it has gone public through an IPO. The company determines a price band, or the company may even set a fixed price for the shares. Investors buy the shares within a time frame. The shares are then allocated according to the market demand. An FPO can either be a dilutive FPO, where new shares are issued, and the total number of shares increases, or a non-dilutive FPO, where existing shareholders sell their shares. The process allows the company to raise capital while giving the investor an opportunity to purchase more shares directly from the issuer.

Types of FPO

Unlike IPOs that either have a Fixed-price offering or a Book Building Offering, FPOs are categorized into three types:

• Diluted FPO: This is the process where the company issues additional fresh shares to the public to raise capital. It results in increasing the company’s total outstanding shares, decreasing the Earnings Per Share (EPS). Furthermore, a diluted FPO always reduces the company’s share price as new investors are added as shareholders. However, the company’s value remains the same. The funds raised through the diluted FPO are generally used to change the company’s capital structure or reduce the outstanding debt.
• Non-Diluted FPO: A non-diluted FPO is when the company’s largest shareholders, such as the founders or board of directors, offer the shares they hold privately to the general public. The process of non-diluted FPO does not increase the number of outstanding shares that are available to the company, but it does increase those available to the public. Unlike a diluted IPO, this method does not increase or decrease the company’s number of shares. Since the number of shares remains unchanged, there is no effect on the company’s Earnings Per Share (EPS). Under non-diluted FPO, the cash proceeds from the public go directly to the largest shareholders who have offered their shares.
• At-the-Market FPO: This allows the companies to raise funds based on the real-time price of the shares. If the company that is issuing the fresh shares through FPO witnessed a fall in the share price, it could pull out from offering the shares to the public. At-the-market FPO is also called controlled equity distribution owing to its feature to offer shares in the secondary market at the current market price of its shares.

Examples of FPO

Numerous companies have used the route of an FPO to raise capital after their Initial Public Offering. Some examples of well-known companies that have issued FPOs in India are Tata Steel Ltd., Power Finance Corporation Ltd, Engineers India Ltd, Power Grid Corporation of India, etc. However, there have been numerous examples where the FPO of companies failed, and the share price fell steeply.

The success of an FPO entirely depends on factors such as the profitability of the company, market and investor sentiments, the current market trend, the growth potential of the company etc. Furthermore, the Indian government has used the FPO method as an effective way to disinvest its stake in government-held listed companies. With a disinvestment target of Rs 1.75 lakh crore for the fiscal year 2021-22, the Indian government is expected to use the FPO process to achieve the target.

Benefits of Follow-on Public Offers (FPOs)  

Now that you know what is FPO let’s see its benefits. FPOs offer many benefits to companies and investors. They do enable companies to have sufficient funds for expansion or re-payment of debts without facing higher loans on more investments. Since a firm issuing such an FPO was earlier listed, this action could be done faster and comparatively with less stringent regulations, given its comparison with an IPO. Furthermore, FPOs enhance market liquidity since there will be more shares for sale.

Why Do Companies Need an FPO?  

Companies opting for FPO means they want to raise additional capital. The money acquired can be substantial in extending the operations, manufacturing new products, or clearing old debts. Unlike borrowing loans, firms issuing their company’s new shares do not need to repay that capital borrowed; thus, it is the least risky option. An FPO can help increase the liquidity of a company’s stock because a large number of shares will become available in the market. It also could be a strategic way of boosting investor confidence as more investments will be attracted into the business to aid its long-term growth objectives.

Final Words

Investors consider FPO to be a better investment option. It is because your risk levels need to be very high to invest in an IPO, as you will not have much valuable insight into the company. Alternatively, an FPO is considered a relatively safer bet for both new investors and individual investors as the investors can evaluate and analyse the company by executing technical and fundamental analyses.

Frequently Asked Questions

Who can apply for an FPO?

Anyone who has a Demat and a trading account can invest in an FPO. These generally include QIBs, Non-Institutional (Companies, NRI, HUF, Trusts etc.) Retail Investors (Resident, NRI, HUF).

Is FPO good or bad?

FPOs are one of the best ways for a company to raise capital along with investors who can buy the shares of a company at a relatively good price.

How is the FPO price calculated?

The company can either use diluted FPO, non-diluted FPO or at-the-market FPO to issue an FPO. The price is set based on market factors, investor demand, and how much the company is looking to raise. The FPO price is generally lower than the market price of the current shares of the company.

What does Non-Dilutive FPO mean?

A non-dilutive FPO means existing shareholders, such as company insiders or institutional investors, sell their shares to the public. Since no new shares are issued, the total share count remains unchanged, and there is no dilution of ownership.