What is FPO?
- 4m0•
- 03 Jan 2023
While most of us know about Initial Public Offering or IPO, few know about Follow on Public Offer (FPO). So, what is FPO, its various types, and its benefits? This blog aims to cover all these aspects to help you better understand FPO. Let’s get started.
Defining FPO
An FPO refers to a process through which a publicly listed company raises additional capital from the market by issuing new shares to existing shareholders or the general public. Unlike an IPO, where a company goes public for the first time, a firm that is already listed on a stock exchange conducts an FPO. The primary objective behind an FPO is to raise funds to support business expansion, finance acquisitions, repay debts, or meet other capital requirements.
Types of FPO
Now that you know the meaning of FPO, let’s understand its different types.
Diluted FPO
In a diluted FPO, the ownership of existing shareholders is diluted. The company chooses to release new shares to the public, thereby increasing the overall number of shares in circulation. With the increase in shares, the ownership percentage of existing shares diminishes, as the newly issued shares also hold a proportionate ownership stake in the company.
Non-diluted FPO
In a non-diluted FPO, there is no dilution of ownership for existing shareholders since no new shares are issued. Instead, the publicly available shares are sourced from non-public shareholders. These shareholders typically include the company's promoters, directors, or pre-IPO investors offering their existing shares to the public.
The table below will help you better analyze these two types of FPOs.
| FPO Type | Before FPO | During FPO | After FPO |
|---|---|---|---|
Diluted | Company issues 100 outstanding shares, where each share represents 1% ownership | Company decides to offer 10 new shares, which takes the total number of share count to 110 | Now there are 110 outstanding shares but the ownership of each share comes down to 0.9% |
Non-diluted | Company issues 100 outstanding shares, where each share represent 1% ownership | Company issues 10 new shares held by promoters to the public, taking total number of shares to 110 | In total there will be 100 outstanding shares where each share will represent 1% ownership |
Why Do Companies Opt for FPO?
Companies opt for an FPO due to several reasons. Some major ones include:
1. Expansion and Growth
Companies often pursue an FPO to fund their expansion plans, such as setting up new production facilities, entering new markets, or acquiring complementary businesses. The additional capital raised through an FPO can provide the necessary financial backing to fuel growth initiatives.
2. Debt Repayment
Companies also utilize FPOs to reduce debt burdens. By raising funds through equity, companies can repay existing loans or outstanding debts, leading to improved financial stability and creditworthiness.
3. Enhancing Working Capital
Companies facing liquidity issues or those seeking to strengthen their balance sheets may choose to conduct an FPO. They use the funds to bolster working capital requirements, ensuring smooth day-to-day operations.
4. Investor Dilution
In certain cases, existing shareholders might wish to reduce their stakes in the company. An FPO allows them to sell their shares to interested investors, thereby decreasing their ownership percentage.
Benefits of FPO for a Company
FPO brings several benefits to a company. Some of them are:
1. Access to Capital
An FPO enables companies to tap into the secondary market for additional capital. Companies can attract investors and raise funds without incurring significant debt by issuing new shares, providing a more sustainable approach to financing growth.
2. Market Visibility and Credibility
Conducting an FPO allows companies to reinforce their presence in the market. It signifies their growth potential, stability, and confidence in their business model, which can enhance their credibility among existing and potential investors.
3. Increased Liquidity:
For existing shareholders, an FPO offers an opportunity to monetize their investments. By creating a liquid market for shares, FPOs provide an avenue for shareholders to sell their holdings and realize their gains, should they choose to do so.
4. Price Discovery:
FPOs often involve setting a specific offering price for the newly issued shares. This process helps discover the fair market value of the company's shares and provides valuable insights to investors and the company.
FPO Impact in the Secondary Market
An FPO directly impacts the secondary market, where investors buy and sell securities after they have been issued in the primary market. When a company announces an FPO, it can increase trading activity and volatility in its shares.
Investors closely analyze the offering details, company performance, and growth prospects before making investment decisions. The successful execution of an FPO can instill confidence in the market, attracting more investors and potentially driving up the company's stock price.
How to Participate in an FPO?
The procedure for applying for an FPO resembles an IPO, as it also involves placing orders through your broker. Just like in an IPO, interested investors can participate in an FPO by submitting their applications through their chosen brokerage firm.
Kotak Securities offers technically superior features that help you easily participate in a follow on public offer. It gives you all the necessary information for making an informed decision. You can see this video to know the info we provided to investors for Ruchi Soya Industries FPO.
The Final Word
Investors perceive FPOs as a more favorable investment option due to several factors. Unlike IPOs, which entail higher risk levels as investors often lack valuable insights into the company, FPOs are regarded as relatively safer investments. This holds true for both new investors and individual investors. The reason is that in an FPO, investors can assess and analyze the company through the execution of technical and fundamental analysis.
By thoroughly evaluating the company's performance, financial indicators, market trends, and other relevant factors, investors can make more informed investment decisions, leading to a perceived reduction in risk.
FAQs
An FPO refers to a subsequent offering of shares or securities by a company that has already completed an initial public offering (IPO). It allows the firm to raise additional capital from the public after its shares have been listed on a stock exchange.
The price of shares in a follow-up public offer is determined through a process known as book-building. The company and its underwriters set a price range within which interested investors can place their bids. Based on the demand and the bids received, the final offer price is determined.
Yes, existing shareholders can participate in a follow-up public offer. They may be given priority or preferential treatment to subscribe to the new shares.
As is the case with any investment, there are certain risks associated with participating in a follow-up public offer. The shares' value can fluctuate, and there is no guarantee of returns. It's important for investors to carefully review the offering documents, consider their investment objectives and risk tolerance, and seek professional advice if needed.
