You may have often come across the term ‘IPO‘ or ‘FPO’ when you read about companies that are looking to gather funds for their operations or expansion. However, the name Initial Public Offering (IPO) is more commonly heard than Follow-on Public Offer (FPO) as there are fewer FPOs than IPOs.
What is FPO?
An FPO is a process to issue shares to investors on the stock exchange. It is a means of raising additional equity capital to meet the company’s need for running their operations or execute their expansion plans. Essentially, the FPO meaning is that any public offerings made after the IPO constitutes an FPO.
How a Follow-on Public Offer (FPO) Work?
A company may issue a Follow-on Public Offer to raise capital for expansion, debt reduction, or working capital. The steps to issue an FPO are the following:
Regulatory approval: Before issuing an FPO, the company needs to receive approval from regulatory authorities, such as SEBI.
Appointing intermediaries: The issuing company must appoint an intermediary or an underwriter to test market interest before issuing FPO. The intermediary helps decide the price of the new shares, which depends on market conditions, the company’s financial performance, and investor demand.
Offer document: Like an IPO, an FPO announcement must be followed by the release of an offer document containing all information regarding the offer, such as the reasons for raising funds, the number of shares to be issued, the issue price, and the use of proceeds. This document must be filed with the regulatory authorities for approval.
Marketing and promotion: The marketing activities may include roadshows, advertisements, and presentations to institutional and retail investors.
Subscription: Investors must submit their applications to subscribe to the newly issued shares within the subscription period. The subscription period typically lasts for a few days.
Allotment: After the subscription period, the company determines the allotment of shares to investors. This process considers factors like oversubscription and allocation methods (pro-rata, lottery, etc.). Listing: Once the shares are listed on the stock exchange, investors can buy and sell the FPO shares like common stocks on the stock exchange.
Example Of a Follow-On Public Offer (FPO)
Several companies have issued FPOs in India to raise additional capital. Patanjali-owned Ruchi Soya is one such example. Ruchi Soya launched FPO on March 22, 2022. The FPO was listed on the stock exchange on April 8, 2022. The company raised an aggregate value of ₹4,300 crore through the FPO.
What Are the Benefits of Follow-On Public Offers (FPOs)?
Companies issue FPOs to raise capital to ensure the company’s operations run smoothly. The following are some of the benefits of issuing FPO.
- Access to capital market: Companies can access the capital markets and tap into a broader pool of investors through an FPO. This can be especially beneficial for companies seeking long-term financing.
- Capital infusion: FPOs enable companies to raise additional capital for various purposes, ranging from debt reduction, business expansion, research and development, and acquisitions, without incurring debt.
- Enhance liquidity: FPOs can increase the liquidity of a company’s stock by increasing the number of available shares in the market. It will attract more investors and potentially lead to higher trading volume.
- Improve public image: Like an IPO, successfully launching an FPO can improve the public’s image and allow the company to access a broader market. This can be especially beneficial for companies seeking long-term financing.
- Portfolio diversification: Investors can diversify their investment portfolios by participating in FPOs across different sectors and industries, spreading risk and potentially increasing returns.
How is an IPO different from an FPO?
In an IPO, the company is unlisted before its Initial Public Offering. This makes it a relatively high-risk investment since the potential investor may not have any track record of the company to analyse before investing.
An FPO, on the other hand, is offered when the company is already listed. This allows the investors to look at market trends and track their potential investment for a while before they make the decision.
While IPOs are used by private companies for fund expansion, a lot of government entities use FPOs to cover their debts or losses or reduce their stake in the company.
What are the types of IPOs and FPOs?
There are two types of IPOs:
1. Fixed-Price offering
A fixed price offering, like the name suggests, offers the initial company shares at a fixed price. The price is decided by the company, and the investors are aware of the share prices before the company goes up for the public offering.
2. Book Building offering
The book-building offering involves a bidding process. The price per share is not fixed. It is determined through a bidding process, and the price is decided after the bidding is closed. The investor must specify how many shares and how much they would pay for the same.
There are two types of FPOs:
1. Dilutive offering
A dilutive FPO is when the company wants to release more shares to collect more funds. This is done to pay off the debts. However, in the case of a dilutive FPO, a company’s value remains unchanged, which results in a decrease in the per-share earnings of the company.
2. Non-dilutive offering
In this case, the founders or large shareholders of the company release some of their shares to the public. The money from this goes to the individual offering the shares and not the company. Therefore, the per-share earnings of the company remain unaffected.
Investing in IPOs and FPOs involves different risks. While IPOs are at high risk, they may also result in higher profits. Whereas FPOs are more reliable since the company is listed and there is more information available about its journey in the stock market.
The nuances of each type of investment, its advantages, disadvantages, and limitations can be challenging to understand completely. If you wish to invest in an FPO but are unsure of how to go about it, you can rely on an investment broker to guide you through it. Get in touch with one now, so that you can start building for your financial future!