Follow-on Public Offer (FPO)

What Is a Follow-On Public Offer (FPO)?

A Follow-On Public Offer (FPO) is a type of public offering in which a company already listed on the stock exchange issues new shares of its stock to the public. The companies that have already raised funds through IPOs by issuing their shares for the first time can issue additional shares through FPOs.

An FPO can be a good option for companies that have already established a track record of success and have a strong following of investors willing to buy additional shares. However, FPOs can also dilute the ownership and earnings per share of existing shareholders, which investors consider before participating in an FPO.

Generally, companies issue FPOs to raise additional funds for various reasons, such as financing expansion plans, paying off debt, or funding acquisitions. The FPO process is similar to an IPO, requiring issuers to draft an offering document and allot shares to investors before listing them on the stock exchanges. 

How a Follow-on Public Offer (FPO) Works

Here is how an FPO works to issue additional shares to investors.

●    Intermediaries Appointment: The company that wants to issue an FPO appoints intermediates such as investment banks and underwriters for assistance. 

●    Offer Document: The company prepares and files with SEBI an offer document for the FPO, which contains detailed information, such as FPO size, lot size etc. 

●    Pricing: Once SEBI approves the offer document, the company sets a price per share for the FPO. It is the price at which investors will apply for the shares included in the lot. 

●    Opening and Closing: The company opens the FPO for a certain period, during which investors can place their bids. Once the bidding period is over, the FPO is closed.

●    Allotment and Listing: Once the FPO application closes, the company allows the shares to investors who applied, along with the final offer price. Afterwards, the shares are listed on the stock exchanges. 

What are the Follow-On Public Offer (FPO) Guidelines?

A Follow-On Public Offer must follow SEBI’s regulations to ensure fairness and transparency for investors. Before a company can bring an FPO to the market, it must disclose detailed information about its financials, management, business operations and why it intends to raise additional capital.

To comply with FPO rules, companies must:

• File a full prospectus outlining financial performance, risks, management details and fundraising objectives.
• Specify the structure of the issue, whether it is a fresh issue or an offer for sale.
• Follow proper pricing norms, including announcing a price band for book-built issues.
• Meet minimum subscription requirements for the offer to be considered valid.
• Ensure compliance with minimum public shareholding norms, if applicable.
• Provide continuous disclosures of any significant developments during the offer period.

How to Apply For an FPO?

Applying for an FPO is simple if you already have a demat account and access to an online trading or banking platform. Investors start by reviewing the offer details and understanding why the company is raising money.

Here’s how the application process usually works:

• Review the offer details, including dates, lot size and price band.
• Read the prospectus to understand financials, risk factors and the purpose of the fundraise.
• Apply via your trading platform or ASBA facility, selecting your bid price or opting for the cut-off price.
• Wait for allotment, which depends on demand; oversubscription can result in proportionate allocation.
• Receive shares in your demat account once allotted, after which they can be traded normally.

Types of Follow-On Public Offers (FPOs)

In the financial spectrum, FPOs are of two types. One of the types results in diluting the ownership, while the other results in no valuation change. 

●    Dilutive FPO: Dilutive FPO is a type of FPO where the companies issue additional shares, increasing the share float in the market. Since the outstanding shares increase, the ownership percentage for current shareholders decreases, decreasing the earnings per share. 

●    Non-Dilutive FPO: In a non-dilutive FPO, the issuing company does not issue new shares of stock. Instead, the company's existing shareholders, such as institutional investors or insiders, sell their shares to the public. The sale does not alter the current shareholders' valuation or ownership percentage.

Example Of An Follow-On Public Offer (FPO)

Numerous companies in India have come up with an FPO where they issued new shares to raise additional capital. Patanjali-owned Ruchi Soya is one such example. Ruchi Soya wanted to raise additional capital and launched its FPO on March 24th 2022, which was open for subscription to investors till 28th March 2022.

The shares had a face value of Rs 2 with a price band of Rs 615 to Rs 650 per share. The lot size for the FPO issue was 21 shares, with the issue size amounting to Rs 4,300 crores. The shares were listed on the stock exchanges on 8th April 2022. 
 

FPO Vs IPO

The Indian stock market contains numerous processes through which companies can raise funds from the public to fund their business activities. Two of the most common and effective ways are IPOs and FPOs. IPO or Initial Public Offering is a financial process that allows private companies to raise capital by issuing shares to the general public for the first time.

The company owners and promoters that come up with the IPO dilute their held ownership by offering shares to the public. Afterwards, the company lists on the stock exchanges as a publicly listed company. 

On the other hand, an FPO or Follow on Public Offer is a financial process that allows companies already listed on the stock exchanges to offer additional shares to the general public to diversify their equity base.

Companies develop an FPO to either raise additional capital for the company or reduce its debt. In the case of an FPO, the Earnings Per Share of the company reduces as more shares float in the stock market. 

FPO Versus Listed Shares

When you participate in an FPO, you’re essentially entering at a price set by the company, which may be at a discount to the current market price to attract investors. This often makes FPOs appealing to those looking to increase their stake in a company they already trust. Since the business is already listed and has a visible performance history, investors can make more informed decisions compared to the uncertainty that often surrounds new listings.

Buying listed shares, on the other hand, gives you complete flexibility. You can purchase them at any time during market hours, react instantly to price movements and exit whenever you choose. The trade-off, however, is that market prices can be volatile and sometimes move sharply based on sentiment, news flow or broader economic trends. Unlike an FPO, there is no protective price band, what you pay depends entirely on the market at that moment.

What Are the Benefits of Follow-On Public Offers (FPOs)?

An FPO is one of the best ways for companies to ensure their operations run smoothly. Here are some of the benefits of an FPO for companies.

●    Capital raising: One of the primary reasons companies launch an FPO is to raise additional capital for the company. The companies can use these funds to pay off debt or invest in expansion. 

●    Increased liquidity: FPO increases the liquidity of the company's shares by increasing the number of shares available in the market. This makes it easier for investors to buy and sell shares in the company.

●    Diversification: An FPO allows companies to diversify its investors base as new investors buy their shares. It also results in diversifying the equity base of the company. 

●    Improved market reputation: A successful FPO can improve a company's market reputation, as it demonstrates investors' confidence in the company's growth potential and financial stability.

What Are the Advantages of At-The-Market (ATM) Offerings?

At-The-Market offerings are a new-age financial process that allows companies to sell their shares gradually over time to the general public directly. Here are some of the advantages of At-The-Market (ATM) offerings: 

●    Flexibility: ATM offerings allow companies to issue their shares in real-time after accessing the market conditions and investor demand. ATM offerings mitigate the chances of a low subscription as the company issues shares after accessing the market. 

●    Market price: One of the best advantages of ATM offerings is the price at which the companies offer their shares. In ATM offerings, the companies can offer shares at the current market price, resulting in better investment returns. 

●    Cost-effective: The shares issuing process through ATM offerings is cost-effective and cheaper than the IPO process. The process does not involve seeking assistance from investment bankers, resulting in lower expenses. 

What Are the Disadvantages of At-The-Market (ATM) Offerings?

Like every other financial process, ATM offerings also have certain disadvantages, including

●    Ownership dilution: One of the main disadvantages of ATM offerings is its resulting decrease in the current ownership of the shareholders. As the company issues additional shares, it dilutes the ownership percentage of the current shareholders. 

●    Limited control: When issuing company shares through ATM offerings, the company has limited control over the pricing of the shares as they are issued at the current market price. If the current price is overvalued, it may lead to a lower subscription. 

●    Volatility: ATM offerings may lead to higher volatility in the market as the investors may react negatively to the news that a company is issuing additional shares. Volatility can disrupt the demand and supply factors, negatively affecting the share price. 

●    Decreased goodwill: Investors may take the news of a company issuing additional shares through ATM offerings negatively, deeming the company to have negative cash flow. 

Should You Subscribe For an FPO?

An FPO is often seen as more advantageous than an IPO because investors already have insights into the company's management, business practices, and growth potential. Since the company is already listed on the stock exchange, investors can refer to its past earnings reports and stock performance for guidance.

FPOs generally carry less risk than IPOs because the price set for the shares is usually lower than the market price, which attracts shareholders to invest. Many investors participate in FPOs to buy shares at a discount and then sell them at a higher price to make a profit.

Although some research is still needed to understand the company's history and performance, it's generally easier to evaluate an FPO than an IPO. This makes FPOs appealing to investors who are willing to take on some risk in exchange for the chance to buy shares at a lower price.

Why does a company need an FPO?

A company may need more money to fund big projects or expand its business. To raise this money, it can offer more shares to the public through a Follow-on Public Offer (FPO). In a dilutive FPO, new shares are created and sold, which increases the total number of shares in the market. This helps the company generate a large amount of money. However, because more shares are now available, the value of each existing share might decrease slightly. This method allows the company to get the needed funds from investors.

Conclusion

An FPO is ideal for a company to raise additional capital from the general public if it needs more funds after raising capital through an IPO. Since the company has already listed its shares through IO, it can only raise additional capital through an FPO, where current or new investors can invest and increase their ownership.

FPOs can be beneficial for both the issuing company and investors, as it provides an opportunity for the company to raise funds for growth and for investors to profit from the company's success potentially. However, as FPOs may come with certain risks, investors must conduct their research and analysis before deciding whether to participate in an FPO.