A follow-on public offer (FPO) allows already listed companies to raise additional funds from the market. Unlike an IPO, it takes place after the company is listed. Understanding what is FPO helps investors assess how such issues may impact share supply and pricing.
What Is a Follow-on Public Offer
A follow-on public offer (FPO) is a method through which a company that is already listed on the stock exchange raises additional capital from the public.
Basic meaning: An FPO allows an existing listed company to issue more shares after its initial public listing.
Primary market activity: The shares are newly issued by the company or offered by existing shareholders, rather than being traded between investors in the secondary market.
Regulatory oversight: The issue is governed by market regulations and requires detailed disclosures to protect investor interests.
Why Companies Launch an FPO
Companies opt for an FPO to fulfil specific financial and strategic objectives.
Raising additional capital: Funds raised may be used for business expansion, capital expenditure, debt repayment, or working capital needs.
Strengthening the balance sheet: Infusion of equity capital can reduce leverage and improve key financial ratios.
Public participation: Enables both existing and new investors to participate in the company’s next phase of growth.
How an FPO Works
The FPO process follows a defined and regulated framework.
Board approval: The company’s board approves the issue size, pricing approach, and intended use of proceeds.
Regulatory filings: Offer documents are submitted to market regulators, detailing financials, risks, and objectives.
Price determination: Shares may be offered at a fixed price or through a book-building mechanism based on demand.
Subscription period: Investors can apply for shares during a specified application window.
Allotment and listing: Shares are allotted and credited to investors’ demat accounts, followed by trading on exchanges.
Types of Follow-on Public Offers
FPOs can be structured differently based on the issuer’s intent.
Dilutive FPO: The company issues new shares, increasing the total share capital and potentially diluting existing ownership.
Non-dilutive FPO: Existing shareholders sell part of their stake without increasing the company’s total shares.
Mixed offering: Combines a fresh issue with an offer for sale to meet both capital-raising and exit objectives.
Difference Between IPO and FPO
While both, IPO and FPO involve public issuance, IPOs and FPOs serve distinct purposes.
Company status: An IPO is used by an unlisted company, while an FPO is issued by a listed entity.
Market familiarity: FPO investors have access to historical performance, share price trends, and disclosures.
Pricing dynamics: IPO pricing focuses on price discovery, whereas FPO pricing is influenced by the prevailing market price.
Risk perception: IPOs generally carry higher uncertainty compared to FPOs.
Pricing of an FPO
Pricing decisions significantly affect investor participation.
Market-linked pricing: FPOs are often priced close to the current market price of the stock.
Discount factor: Some issuers offer shares at a discount to improve demand and subscription levels.
Demand sensitivity: Strong or weak investor interest can influence final pricing outcomes.
Impact of FPO on Share Price
An FPO may affect the stock price, especially in the short term.
Supply increase: Additional shares can temporarily increase supply and create price pressure.
Use of funds: Positive investor reaction is more likely if funds are deployed for growth or value creation.
Market sentiment: Overall confidence in the company and broader market conditions plays a key role.
Market Participants Associated with FPO
FPOs are accessible to a broad range of market participants.
Retail investors: Can apply within the retail investor quota through the usual application process.
Institutional investors: Participate through dedicated segments such as QIBs or anchor investors.
Existing shareholders: May participate, though preferential treatment depends on issue structure.
Advantages of Investing in an FPO
FPOs provide certain advantages over first-time offerings.
Operational history: Investors can evaluate audited financials and business performance.
Market price reference: The existing share price helps in assessing valuation.
Lower uncertainty: The business model and management track record are already known.
Limitations and Risks
Despite being familiar, FPOs are not risk-free.
Dilution risk: Fresh equity issuance can reduce earnings per share.
Short-term volatility: Stock prices may fluctuate after allotment due to market reactions.
Objective dependency: Long-term value depends on how effectively the raised funds are utilised.
How FPOs Fit into the Primary Market
FPOs play an ongoing role in capital market development.
Capital recycling: They allow companies to raise funds beyond their initial listing.
Investor access: Investors can participate in later stages of corporate growth.
Market depth: Regular FPOs strengthen the primary market ecosystem and liquidity.
Conclusion
Knowing what is FPO helps investors differentiate between IPO and FPO. An FPO is used by listed companies to raise more capital, and reviewing the company’s fundamentals, purpose, and pricing is key to evaluating the issue.
