"FPO" or Follow-On Public Offer is a term frequently used in the world of stock markets. But what is FPO, and what effects does it have on companies and investors? In simple terms, a follow-on public offer meaning refers to the process whereby a company, already listed on a stock exchange, issues additional shares of its stock to the public. Following the initial public offering (IPO), companies can raise capital by selling more shares in follow-on offerings.
Understanding what FPO is in the stock market is important for both companies and investors. Through FPOs, companies can raise capital, enhance liquidity, and diversify their investor base, reinforcing their market reputation. In this article, let's explore what is FPO in the share market, understand what is FPO clearly with examples, how it works, its types, and benefits.
What is FPO in the Share Market?
FPO stands for Follow on Public Offer. But what is FPO in the stock market? The term follow-on public offer meaning refers to a public offering in which a company listed on the stock exchange issues new shares. With FPOs, companies that have already raised funds via IPOs can issue additional shares for the second time.
For companies with a track record of success and investors willing to purchase additional shares, FPOs can be a good option. However, before participating in an FPO, investors should consider the effects of FPOs on their ownership and earnings per share.
Companies typically issue FPOs to raise additional funds to finance expansion plans, pay off debt, or fund acquisitions. Like an IPO, the FPO process involves drafting an offering document and issuing shares to investors before listing them on the stock exchanges.
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How does a Follow-On Public Offer work?
To issue additional shares to investors, an FPO follows these steps.
The Appointment of Intermediaries
Companies interested in issuing FPOs appoint intermediaries such as investment banks and underwriters.
Offer Document to SEBI
A detailed offer document containing information such as FPO size and lot size is prepared by the company and filed with SEBI.
When SEBI approves the offer document, the company sets a price per share for the FPO. This is the price at which investors can purchase the lot of shares.
Opening and Closing
An FPO is open for a period during which investors can submit bids. FPOs are closed as soon as the bidding period is over.
Allotment and Listing
Upon closing the FPO application, the company issues the shares to investors along with the final offer price. After that, the shares are listed on the stock exchanges.
Example of an Follow-On Public Offer
Let’s understand the following public offer meaning with an example. In India, many companies have issued new shares to raise additional capital through FPOs. One example is Patanjali-owned Ruchi Soya. In March 2022, Ruchi Soya launched its FPO to raise additional capital, which was open to investors until the 28th of March 2022.
The face value of the shares was Rs 2, and the price band was Rs 615 to Rs 650. It comprised 21 shares per lot, and the issue size totalled Rs 4,300 crores. On 8th April 2022, the shares were listed on the stock exchanges.
FPOs have also been issued by Tata Steel Ltd., Power Finance Corporation Ltd., Engineers India Ltd., and Power Grid Corporation of India. However, there have been many examples of FPOs that have failed, resulting in steep share price drops.
In order for an FPO to succeed, there are a number of factors to consider, like profitability, investor sentiment, current market trends, and growth potential. Moreover, the Indian government has disinvested in government-held listed companies using the FPO method. The Indian government is expected to use the FPO process to achieve its disinvestment target of Rs 1.75 lakh crore for fiscal year 2021-22.
Types of Follow-On Public Offers
After learning what FPO is in the share market with examples and how it works, let’s understand the types of follow-on public offers. There are three types of FPOs:
This is when a company issues new shares to raise capital. This increases the company's total shares outstanding, lowering Earnings Per Share (EPS). As new investors join as shareholders, a diluted FPO always lowers the company's share price. However, the company's value remains the same. By raising money through a diluted FPO, companies can change their capital structure or reduce their debt.
A non-diluted FPO occurs when the company's biggest shareholders, such as its founders and board, sell their shares privately. In a non-diluted FPO, the number of outstanding shares does not increase, but those that can be purchased by the public do. This method doesn't increase or decrease shares like a diluted IPO. Since the number of shares stays the same, Earnings Per Share (EPS) stays the same. In a non-diluted FPO, the cash proceeds go directly to the biggest shareholders.
A company can raise funds based on the real-time price of its shares. A company issuing fresh shares through FPO can pull out of the offering if its share price falls. Due to its ability to offer shares on the secondary market at current market prices, at-the-market FPOs are also called controlled equity distributions.
Benefits of Follow on Public Offer
FPOs are an effective way for companies to ensure smooth operation. A company can benefit from an FPO in the following ways.
An FPO is often launched to raise additional capital. Funds from these investments can be used by companies to pay off their debt or invest in expansion.
An Increase In Liquidity
By increasing the availability of the company's shares on the market, the FPO increases their its liquidity. As a result, investors are able to buy and sell shares more easily.
As new investors buy shares, an FPO enables companies to diversify their investor base. In addition, it diversifies the company's equity base.
Improved Market Reputation
FPOs can enhance a company's reputation in the market because they demonstrate investors' confidence in the company's financial stability and growth potential.
In the world of the stock market, understanding what is FPO is crucial for companies and investors. Follow on public offer meaning refers to the process where companies issue additional shares post their IPO. The purpose of FPOs is to strengthen a company's finances, while investors benefit from diversifying their portfolios through FPOs.
In addition to financial expansion, FPOs are also a sign of investor confidence in a company's future. BlinkX aids investors in making informed decisions in such a crowded market. With FPOs shaping market dynamics, it becomes paramount to embrace the possibilities they offer. Take a deeper dive into this financial realm with BlinkX and make confident investments. Also, Download a share market app to explore more things in trading.
Frequently Asked Questions
FPO occurs when existing companies listed on the stock exchange offer new shares to existing shareholders or to new investors.
As the name suggests, FPO follows an IPO. Follow-on public offerings are made after a company is listed on a stock exchange. The difference between an FPO and an IPO is that an FPO is an additional issue, whereas an IPO is the first issue.
In comparison to FPOs, an IPO can provide higher returns for investors and may turn out to be profitable for them.
Private entities generally use IPOs to expand their funds, while government entities use FPOs to reduce their stake in the company or cover their debts.
Anyone with a Demat account and a trading account can invest in an FPO. Generally, these include QIBs, Non-Institutional Investors (Companies, NRIs, HUFs, Trusts, etc.), and Retail Investors (Residents, NRIs, HUFs).
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