What is FPO (Follow-on Public Offer): Meaning & How It Works

The term FPO, or Follow-on Public Offer, plays a significant role in stock markets and public investments. This is true, especially in India, where the capital market is growing. FPO is a method by which already-listed companies raise additional capital from the public. Unlike an Initial Public Offer (IPO), where a company goes public for the first time, an FPO involves the issuance of shares to investors by a company that is already publicly traded. The process allows companies to diversify their equity base, fund growth strategies, or reduce debt.

What is FPO?

A Follow-on Public Offer is a stock issuance by a publicly traded company to raise additional capital. While an IPO is a landmark event that shifts a company from private to public status, an FPO occurs after that transition. Companies usually opt for an FPO for several reasons: finance acquisitions, fund capital expenditure, or pay down debt.

In the Indian market, FPOs have been increasingly popular as they provide a quicker way for companies to raise capital without diluting the ownership of existing stakeholders to a large extent.

Regulatory Framework

In India, FPOs are governed by the Securities and Exchange Board of India (SEBI). Companies have to meet stringent guidelines, disclose financials, and pass through various audits before they are given the green light to issue an FPO.

Pricing Mechanism

Unlike IPOs, the pricing in FPOs is generally more transparent. Since the company is already publicly traded, historical trading data and financials are available, which makes it easier for investors to evaluate the offer.

Risk and Returns

Investing in an FPO comes with its own set of risks and rewards. It is generally considered less risky than an IPO because the company is already publicly traded, and a wealth of information about its performance is available. However, the success of the FPO depends on how effectively the raised capital is utilised.

How Does a Follow-on Public Offer Work?

The mechanism behind a Follow-on Public Offer in India is a multi-step process that closely aligns with regulatory guidelines set by the Securities and Exchange Board of India (SEBI). Here’s how it generally functions:

1. Need Assessment

   The first step in an FPO process is for the company’s board to identify the need for additional capital. This could be for various reasons, such as expansion, acquisitions, or debt reduction.

2. Regulatory Approval

   Before proceeding, the company must obtain approvals from regulatory bodies, including filing a draft red herring prospectus (DRHP) with SEBI detailing the intended use of the funds.

3. Price Band

   One of the unique aspects of an FPO in the Indian market is the price band. Companies must offer a price range within which investors can bid for shares. The final price is decided after considering the bids.

4. Offer Period

   Unlike IPOs, which can be oversubscribed, FPOs usually have a set offer period during which investors can buy the shares. The period is typically shorter than that of an IPO.

5. Allotment

   After the closure of the offer period, shares are allotted to investors based on the bids received. A lottery system may be employed to ensure fair distribution in case of oversubscription.

6. Listing

   Post-allotment, the new shares are listed on stock exchanges, thereby increasing the total number of shares in circulation for the company. This process is generally quicker for FPOs than for IPOs.

7. Utilisation of Funds

   Companies are obligated to update their investors on how the funds raised are being utilized. This is generally outlined in quarterly reports and annual general meetings (AGMs).

8. Performance Monitoring

   Investors and regulatory bodies closely monitor how well the raised capital is utilized to meet the objectives stated in the prospectus.

The process is intricate and bound by stringent regulatory frameworks designed to protect the investing public’s interests.

Types of FPO

Follow-on Public Offers

in the Indian market can primarily be classified into two types

1. Dilutive FPO

   In a dilutive FPO, the company issues new shares, thereby increasing the total number of shares in circulation. This leads to a dilution of ownership for existing shareholders. However, the capital raised directly benefits the company, enabling it to pursue growth initiatives or reduce debt. This is the most common form of FPO and is generally seen as beneficial if the company has a solid track record and growth prospects.

2. Non-Dilutive FPO

   Unlike dilutive FPOs, non-dilutive ones don’t involve the issuance of new shares by the company. Instead, existing shareholders such as promoters or venture capitalists sell off a portion of their holdings. While this increases the liquidity of the shares, it doesn’t provide any new capital to the company. Investors should be cautious with this type, as it may indicate that existing large shareholders are reducing their stake.

Each type has its own set of advantages and disadvantages

• Advantages of Dilutive FPO

  More capital for the company, growth potential, and generally positive market sentiment.

• Disadvantages of Dilutive FPO

  Dilution of ownership and possibly earnings per share (EPS) for existing shareholders.

• Advantages of Non-Dilutive FPO

  Increased liquidity of shares, no dilution of ownership for existing shareholders.

• Disadvantages of Non-Dilutive FPO

  No new capital for the company, potential negative sentiment if large shareholders are exiting.

Understanding these types is crucial for investors in India as it provides insights into the company’s motives behind the FPO and helps in making an informed investment decision. It’s essential to read the offer documents carefully and possibly consult a financial advisor to understand which type of FPO is more aligned with your investment goals.

Example of An FPO

One of the most illustrative examples of a Follow-on Public Offer would be that of the State Bank of India (SBI) in 2014.

SBI, one of India’s largest public sector banks, announced an FPO to raise around INR 8,032 crore. The primary objective was to augment the bank’s capital base to meet the growing business needs and comply with international capital adequacy norms.

SBI followed the standard protocol, beginning with the approval from its board and then filing the Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI).

The FPO was dilutive, meaning new shares were issued, leading to the dilution of ownership for existing shareholders. The price band for the FPO was set at INR 1,500-1,590, and the offer was open for a specified period.

The FPO saw significant interest from retail and institutional investors, resulting in an oversubscription. Eventually, the shares were allotted, and the new shares started trading on the stock exchanges shortly after the closure of the FPO.

This example illustrates several key aspects of how an FPO operates, including the necessity for regulatory approvals, the setting of a price band, the public’s participation, and finally, the listing of new shares.

It also highlights the importance of the FPO as a financial instrument for companies looking to raise significant capital without taking on debt, especially in a growing economy like India.

What are the Benefits of FPOs?

Follow-on Public Offers

offer many benefits to the issuing companies and the investors such as –

For Companies

1. Quick Capital Raising

   Compared to IPOs, FPOs are quicker means of raising capital as the company is already publicly traded and has fulfilled most regulatory requirements.

2. Lower Costs

   Since the company is already listed, many listing costs associated with IPOs are eliminated, making FPOs a more cost-effective way to raise funds.

3. Debt Reduction

   Companies can use the capital raised through FPOs to pay off high-interest debts, thereby improving their balance sheets.

4. Business Expansion

   FPOs fund mergers, acquisitions, or launching new product lines.

For Investors

1. Lower Risk

   Investing in an FPO is generally considered less risky than investing in IPO because the company is already publicly traded, and more information is available for due diligence.

2. Potential for High Returns

   Investors can gain through capital appreciation if the capital raised is utilized efficiently.

3. Ownership

   FPOs allow existing shareholders to purchase additional shares, thereby increasing their ownership stake without the company resorting to external borrowing.

4. Market Sentiment

   An FPO often boosts market sentiment around the company, at least in the short term, which can benefit existing shareholders.

5. Diversification

   An FPO allows new investors to enter the market and diversify their portfolios without waiting for a new upcoming IPO.

In the rapidly evolving Indian financial landscape, FPOs are a versatile tool for companies to fuel their growth and for investors to potentially realize substantial gains.

Why Does A Company Bring Its FPO?

Companies in the Indian financial landscape opt for a Follow-on Public Offer (FPO) for various strategic reasons, each catering to their unique financial and operational needs. The below-mentioned primary motivations behind a company’s decision to bring an FPO should help you understand.

1. Capital Requirement

   One of the most straightforward reasons is raising capital. Whether for business expansion, R&D, or launching a new product line, an FPO provides the necessary funds without the company having to take on more debt.

2. Debt Reduction

   Companies burdened by high-interest loans may use an FPO to reduce their debt levels, improving their balance sheet and credit ratings.

3. Regulatory Compliance

   In India, listed companies must maintain a minimum public shareholding as specified by market regulators. Companies falling short of this may opt for an FPO to meet these norms.

4. Ownership Dilution

   An FPO can be a strategic move to dilute the ownership of existing shareholders, including the promoters, in scenarios where a more diversified ownership benefits the company.

5. Mergers and Acquisitions

   Companies planning to acquire other businesses or assets may use an FPO to quickly raise the large amounts of capital required for such transactions.

6. Enhanced Market Visibility

   An FPO can also serve as a marketing tool, drawing attention to the company’s growth prospects and potentially boosting its stock price in the short term.

7. Strategic Partnerships

   Sometimes, an FPO is issued to allow a new strategic partner to acquire a stake in the company, thereby adding value through technology transfer, market access, or other synergies.

How Does An FPO Affect An Investor?

The impact of a Follow-on Public Offer on an investor can be multifaceted, particularly in the Indian market, where a diverse array of companies opt for FPOs for various reasons. Here’s how an FPO can affect an investor

1. Ownership Dilution

   In a dilutive FPO, the issuance of new shares can dilute the ownership of existing shareholders. However, this is often offset by the increased market capitalisation.

2. Potential for Higher Returns

   If the capital raised is used effectively for business growth or debt reduction, it can result in higher returns for the shareholders in the form of capital appreciation and possibly increased dividends if the company regularly gives dividends.

3. Liquidity

   An FPO increases the number of shares in circulation, thereby often enhancing the stock’s liquidity, which benefits investors looking to buy or sell shares.

4. Price Volatility

   The period surrounding the announcement and issuance of an FPO can result in increased price volatility. While this presents an opportunity for short-term gains, it also increases the risk.

5. Increased Information

   Companies issuing an FPO must provide detailed information about their financials and future plans, offering investors more data for their due diligence.

6. Investment Diversification

   For new investors, participating in an FPO presents an opportunity to diversify their portfolio by investing in a company that has already demonstrated its market viability.

7. Sentiment-driven Movements

   The success or failure of an FPO can significantly affect market sentiment for that particular stock. Positive uptake often boosts stock price, while a poor reception can lead to a decline.

8. Tax Implications

   Depending on the nature of the FPO and the investor’s subsequent actions, there could be tax implications like capital gains tax that need to be considered.

Whether you are an existing shareholder considering increasing your stake or a new investor contemplating investing in that stock, understanding the impact of an FPO on your investment portfolio is key for optimising your returns.

How to Apply For An FPO?

In the Indian financial ecosystem, applying for a Follow-on Public Offer is a streamlined process. Yet, it requires diligent attention to detail.

Follow the steps below to apply for an FPO

1. Research and Select

   Begin by researching the companies that are launching an FPO. Look into their financials, growth prospects, and the reasons behind the FPO to make an informed choice.

2. Read the Offer Document

   Always read the offer document or the red herring prospectus that contains essential details like the offer size, price band, and the objectives of raising the capital.

3. Eligibility Criteria

   Ensure you meet the eligibility criteria outlined in the offer document. This usually includes having a Demat account and other KYC norms.

4. Funding

   Make sure you have sufficient funds in your bank account linked to your Demat accountto help you participate in FPO.

5. Online Application

   Most brokerage firms offer an online platform where you can apply for an FPO. Alternatively, you can apply through the stock exchange website where the FPO is listed.

6. ASBA

   Application Supported by Blocked Amount (ASBA) is the SEBI-mandated method for applying to public issues like FPOs. This ensures the application money remains in the applicant’s bank account until allotment.

7. Bidding

   Enter the number of shares you want to apply for and the price within the specified price band.

8. Submission and Acknowledgment

   After completing all the necessary details, submit your application. You’ll receive an acknowledgement number for tracking your application status.

9. Allotment and Listing

   Once the offer period closes, the allotment process begins. If allotted shares, they will be credited to your Demat account. Subsequently, they will be listed on the stock exchange for trading.

Wrapping Up

In India’s dynamic financial market, Follow-on Public Offers are an efficient means for companies to raise capital and investors to find promising ventures. They present an effective fundraising avenue for already-listed companies and offer investors the opportunity to back firms with an established history. However, FPOs are not without risks and complexities. Both companies and investors must conduct thorough research and plan diligently to benefit from FPOs fully.