Follow-on Public Offering (FPO)

FPO, also known as a follow-on public offering, is a process through which a listed company raises further capital by selling new shares to the public.

What is an FPO?

An FPO (Follow-on Public Offering) is a way for companies that are already listed on the stock exchange to raise additional capital by offering more shares to the public for purposes like business expansion, debt repayment or acquisitions. Unlike an IPO (Initial Public Offering), which is the first time a company sells its shares to investors and gets listed, an FPO is a subsequent offering.

This makes it less risky for investors because the company has a track record, its financial statements are publicly available, and its stock already trades in the market. Investors can review past performance, management decisions, and market behaviour before investing.

Types of FPO

FPOs are categorised into three main types:

Dilutive FPO

In this type, the company issues new shares, increasing the total number of outstanding shares. This can dilute the ownership percentage of existing shareholders and may lead to a decrease in earnings per share (EPS).

Non-Dilutive FPO

Here, existing shareholders, such as promoters or major stakeholders, sell their shares to the public. Since no new shares are created, the total number of outstanding shares remains unchanged, and there is no dilution of EPS.

At-the-Market FPO

In this approach, companies issue new shares at the current market price. This method offers flexibility, allowing companies to raise capital as needed, depending on market conditions

FPO vs. IPO: Key Differences

Here’s a quick comparison to help you understand how an FPO differs from an IPO:

How to Invest in an FPO

Investing in an FPO involves the following steps:

Research the Company

Review the company’s financial statements, historical earnings, and growth potential. Understand why the company is raising funds, whether it’s for expansion, debt repayment, or working capital needs.

Open a Demat Account

If you don’t already have one, open a Demat and trading account with us. A Demat account is essential for holding shares in electronic form, and a trading account is required to place buy orders.

Apply for the FPO

Once the FPO is open, you can apply through your broker. You’ll need to select the number of shares you want and the price, if it’s a book-built issue.

Allotment and Listing

After the application window closes, shares are allotted based on demand and availability. If you receive an allotment, the shares will reflect in your Demat account.

How does FPO work?

An FPO (Follow-on Public Offer) follows a structured process through which a listed company raises additional capital:

Appointment of Intermediaries

The company appoints investment banks and underwriters to manage and assist with the FPO process.

Preparation of Offer Document

A detailed offer document is created, including information like issue size, pricing, and company details. This is submitted to SEBI for approval.

Pricing of Shares

Once approved, the company decides the price of shares, either through a fixed price or a book-building method.

Opening and Closing of Issue

The FPO is opened for a specific period during which investors can apply. After the bidding window closes, no further applications are accepted.

Allotment and Listing

Shares are allotted to investors, and the newly issued shares are listed on stock exchanges for trading.

Importance of FPO

Access to Capital for Growth

FPOs help companies raise additional funds that can be used for expansion, acquisitions, or reducing debt. This capital infusion supports new projects, helps the company scale operations faster, and improves overall competitiveness in the market over time.

Better Price Discovery

Since FPOs are market-driven, they help in efficient price discovery based on current demand and supply. Unlike IPOs, prices in an FPO reflect real-time investor sentiment, allowing the stock to settle near its true market value.

Increased Liquidity

Issuing more shares increases the number of shares available for trading, improving liquidity in the stock market. Higher liquidity makes it easier for investors to enter or exit positions, reducing volatility and promoting smoother price movements in trading.

Improved Credibility

A company announcing an FPO often signals business stability and investor confidence, which can improve its public image. It also indicates strong corporate governance, management transparency, and long-term planning, attracting institutional investors and analysts’ positive attention.

Disadvantages of FPO

Dilution of Ownership

In a dilutive FPO, issuing more shares reduces the ownership percentage of existing shareholders. This can impact voting power, future dividend claims, and control over company decisions for long-term retail or institutional shareholders.

Fall in Earnings per Share (EPS)

With more shares in circulation, the company’s profits get divided among a larger number of shares, reducing EPS. Lower EPS can negatively affect the valuation, reduce investor confidence, and sometimes lead to lower stock prices in the near term.

Stock Price Pressure

Increased supply of shares can lead to short-term price drops, especially if the demand doesn’t match the offering size. A weak market response to an FPO may signal a lack of investor interest, affecting both the issue performance and post-listing movement.

Uncertain Returns

If the company’s future growth prospects are weak, the FPO may not deliver good returns, and investors could face losses. Investors must assess how the raised funds will be utilised, as poor execution or market sentiment can quickly erode investment value.

Frequently Asked Questions (FAQs)

What is the main purpose of an FPO?

An FPO is mainly used by listed companies to raise additional funds for business needs like expansion, debt repayment, or acquisitions. It helps strengthen the company’s balance sheet and ensures continued growth by accessing public market capital.

Is investing in an FPO safer than an IPO?

Generally, yes. FPOs are considered less risky as the company is already listed and its financials are publicly available. Investors can assess historical performance and market sentiment before making a decision. That said investor must do their due diligence before making any investing/trading decision.

Do FPOs dilute existing shareholding?

Yes, in a dilutive FPO, new shares are issued, which can reduce the ownership percentage of existing shareholders. This can also affect the earnings per share (EPS) and influence stock price dynamics.

How can I apply for an FPO?

You can apply through your Demat account using your broker’s platform or via ASBA on your bank’s net banking portal during the offer period. Make sure to review the offer details and bid within the specified price band and timeline.

How is FPO Calculated?

The price of an FPO (Follow-on Public Offer) is decided by the company and its underwriters based on market conditions and demand.

There are two main methods:

1. Fixed Price Method: The company sets a specific price at which shares are offered.

2. Book Building Method: A price range is provided, and the final price is determined based on investor demand.

Factors like current market price, company performance, and investor interest influence the final FPO price.