What is Follow on Public Offer (FPO)?

"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 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.

Understanding Follow on Public Offers (FPO)

FPO, also known as a Follow-up Public Offering, is the procedure by which a business offers fresh shares to investors after being listed on the stock exchange via an Initial Public Offering. The FPO is a straight follow-up to an IPO and allows corporations to obtain new capital after previously raising cash through the IPO.

An FPO is used to obtain more cash and pay off any existing debt that the firm has. The procedure for doing an FPO is identical to that of an IPO. However, as compared to an IPO, the FPO procedure is less expensive.

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.

Pricing

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 a 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 a Follow-On Public Offer

Many Indian enterprises have used an FPO to obtain extra money by issuing new shares. Ruchi Soya, which is owned by Patanjali, is one such case. Ruchi Soya wished to acquire more cash and published its FPO on March 24th, 2022, which was open for investor subscription until March 28th, 2022.

The shares had a face value of Rs 2 and were priced between Rs 615 and Rs 650 per share. The FPO issuance had a lot size of 21 shares, with a total issue size of Rs 4,300 crores. On April 8, 2022, the shares were listed on the stock markets. 

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:

Diluted FPO 

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.

Non-Diluted FPO 

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.

At-the-Market FPO 

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.

FPO vs IPO

To raise cash for firms, the Indian stock market employs IPOs and FPOs. IPOs erode ownership, but FPOs enable businesses to diversify their share base, acquire more cash, or decrease debt.

Benefits of Follow on Public Offers 

FPOs are an effective way for companies to ensure smooth operation. A company can benefit from an FPO in the following ways.

Capital Raising 

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 its liquidity. As a result, investors can buy and sell shares more easily.

Diversification 

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.

Conclusion 

FPOs, or follow on public offers, are crucial in the stock market for companies and investors. They strengthen a company's finances and diversify portfolios. FPOs also signify investor confidence in a company's future. Blinkx helps investors make informed decisions in a crowded market, emphasising the importance of embracing the possibilities offered by FPOs. Also, Download a share market app to explore more things in trading.