How a Follow-on Public Offer (FPO) works
Here is how an Follow on Public Offer works in the stock market:
1. Intermediaries appointment:
- The company appoints intermediaries such as investment banks and underwriters to assist with the FPO.
2. Offer document preparation:
- The company prepares an offer document containing detailed information about the FPO, including its size, lot size, and other relevant details.
- This document is filed with the Securities and Exchange Board of India (SEBI) for approval.
3. Pricing:
- Once SEBI approves the offer document, the company sets a price per share for the FPO.
- Investors apply for shares at this specified price.
4. Opening and closing:
- The company opens the FPO for a specific period during which investors can place their bids.
- Once the bidding period ends, the FPO is closed.
5. Allotment and listing:
- After the FPO application period, the company allocates shares to investors who applied.
- The shares are then listed on the stock exchanges.
Types of FPO
Now that you know what an FPO is in the share market, let’s explore the different types a company may announce. Follow-On Public Offerings are broadly categorised into the following three types:
1. Dilutive FPO
A dilutive follow on public offer occurs when a company issues fresh equity shares as part of its Follow-On Public Offering. Due to the issue of additional shares, the total number of outstanding shares of the company increases. This, in turn, dilutes the ownership control of existing shareholders.
It also decreases the Earnings Per Share (EPS) and the current market price due to the addition of new shareholders. The proceeds from a dilutive FPO go entirely to the company and can be used to further its business objectives.
2. Non-dilutive FPO
A non-dilutive FPO, on the other hand, is when the promoters or other shareholders of the company sell their shares to external investors. Since no new shares are issued, such Follow-On Public Offerings don’t increase the total number of outstanding shares of the company.
This means there is no dilution of ownership or reduction in the EPS or share price. The proceeds from a non-dilutive FPO go entirely to the selling shareholders and not to the company itself.
3. At-the-market FPO
In an at-the-market FPO, companies issue new shares to the public at the current market price. If the share price witnesses a significant decline, the company can pull out of the public issue entirely. At-the-market FPOs are also known as controlled equity distributions since companies issue shares to interested investors directly through the secondary market.
How to apply for an FPO?
If you're considering investing in an FPO, here’s how you can go about it:
Understand the FPO – Begin by understanding the FPO and the company offering it. Go through the prospectus thoroughly, which provides key insights into the company’s background, financial performance, and the reason for raising additional capital.
Open a Demat Account – Ensure that you have an active Demat account since shares from the FPO are credited there. In case you do not have one already, you can get it opened through a registered Depository Participant (DP).
Choose the Applying Method – Decide if you prefer applying for the FPO online or offline via physical application forms.
Online Method – You may apply using the ASBA (Application Supported by Blocked Amount) facility. This method blocks funds in your HDFC Bank account till the allotment takes place.
Offline Method – Alternatively, collect the physical form from authorised entities like the NSE or BSE. Fill it accurately with all necessary information.
Submitting the Application – Submit the completed application and payment via cheque or demand draft to the authorised intermediary handling the offer.
Allotment and Listing – Once the FPO closes, allotment is made based on demand. The company and exchanges share the allotment and listing details with investors through official channels.
Examples of FPOs
An FPO example from the Indian stock market is the offering by Power Finance Corporation (PFC) Limited, which was well-received by investors. Other notable FPO examples include Tata Steel Limited, Power Grid Corporation of India, and ITI Limited, all of which illustrate how companies raise additional capital post-IPO.
That said, not all follow-on public issues end up being successful. There have been many instances where companies have failed to garner enough investor interest to go through with the issue. In other cases, the share prices of companies that opted for FPOs fell so steeply that they never recovered.
Why does a company need an FPO?
Companies opt for an FPO primarily to raise additional funds. This capital can be used for large-scale projects, business expansion, or repaying existing debts. In the case of a dilutive FPO, new shares are created and sold, increasing the number of outstanding shares in the market. While this may slightly reduce the value of existing shares, it enables the company to gather substantial funding to fuel its future growth.
Should you subscribe to an FPO?
Compared to IPOs, follow-on offerings generally carry less risk since the company is already listed and has a performance history. These shares are often priced below market value, offering investors an opportunity to profit by selling later at a higher price, making them attractive to both retail and institutional participants.
Benefits of Follow-On Public Offers
An FPO is an effective way for companies to ensure their operations run smoothly. Here are some of the advantages of this offering for companies:
- Capital raising: Helps companies generate funds for expansion, operations, or debt repayment.
- Reduced investor risk: Since the company is already publicly traded, investors can review its financial history and market performance.
- Increased liquidity: Issuing more shares boosts market liquidity and reduces price volatility.
- Debt reduction: Funds raised through an FPO can be used to clear existing loans, improving the company’s financial stability.
- Builds investor confidence: A well-executed FPO reflects sound business planning and can attract more investor interest.
- Access for retail investors: Existing and new investors get a chance to buy additional shares, often at a more favourable price.
Conclusion
With this, you must now be aware of what an FPO in the stock market is and the different types of FPOs possible. Follow-On Public Offerings are an excellent way for companies to gain access to capital for furthering their business objectives.
However, it can also be detrimental to their existing investors since the issue of more shares can dilute their ownership control and reduce the Earnings Per Share (EPS). So, a company that wants to issue an Follow on Public Offer in the capital market should do so only after deliberation and considering the various risks involved.
Related articles:
What are the Different Types of IPO
How is an IPO Valued
What is IPO Allotment Process
How to Check your IPO Allotment Status
