What is FPO?
Every business activity requires funds to execute the ideas successfully and achieve predetermined financial goals. If a company wants to develop a new product, it needs capital for R&D, manufacturing and marketing. The same need for capital goes towards expansion, which is seen as the fundamental factor in increasing a company’s profitability. However, as the company grows bigger and aims towards better profitability, the need for capital rises immensely. Almost all companies try to avoid taking loans from financial institutions as higher debt can reflect negatively on a company’s balance sheet.
In such a case, where companies want to raise funds without borrowing, they look towards an Initial Public Offering. IPO is a means for the company to get listed on the stock exchange and allow its shares to be traded on the exchange. When a company offers its equity to the public for the first time, it is called "Initial Public Offering (IPO)".
However, what happens when the company wants to raise more capital after a few years of an IPO? That is where they leverage a capital raising process called Follow-on Public Offer (FPO).
Know more about FPO?
FPO, also called a Follow-up public offering, is the process through which a company issues new shares to the investors after it has already been listed on the stock exchange through an Initial Public Offer. The FPO is a direct follow-up to an IPO and allows companies to raise fresh capital after having already raised funds in the past through the IPO.
An FPO is carried out to raise additional capital and reduce any existing debt that the company needs to pay off. The process for carrying out an FPO is similar to that of an IPO. However, the FPO process is more cost-effective when compared to an IPO.
Types of FPO
Unlike IPOs that either has 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 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 witnesses the fall in the share price, it can pull out from offering the shares to the public. At-the-Market FPO is also called controlled equity distributions 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 the 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, 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.
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 analysis.
Frequently Asked Questions Expand All
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).
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.
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.