Follow on Public Offer (FPO) - Types & Why does a Company Need an FPO?

Have you ever heard of a company raising money by selling some of its shares to the public? Well, this is called a Follow-on Public Offer (FPO). Companies do this when they need more funds to grow or pay off debts. It's a way for companies to offer more shares to the public after their initial stock offering.

Now, you might be thinking, "Why would a company do this?" Companies may need money for many reasons. They could want to expand, build new products, or even pay off old loans. Sometimes, even though a company has already sold shares once (through an Initial Public Offer or IPO), it may want to raise more money later.

An FPO helps companies get that extra money by offering shares to new and existing investors. It’s like when someone sells a piece of their belongings to raise money for something important.

Get instant access to markets—Open Demat account

What is a Follow-on Public Offer (FPO)?

A Follow-on Public Offer is when a company that is already listed on the stock market offers additional shares for sale to the public. These shares are sold to raise more funds for the company's needs. Companies may do this after their initial public offering (IPO), which is the first time their shares are offered to the public.

FPOs can help companies raise large amounts of money quickly, which they can use for several purposes, like paying off debts or funding expansion projects.

When a company is already public and has its shares on the stock market, it can issue new shares through an FPO. This process increases the number of shares available in the market, but it also gives the company the funds it needs for growth.

How Follow-on Public Offers (FPOs) Work

When a company decides to go for an FPO, it works like this:

1. Announcement: The company decides how many shares it wants to sell and at what price. It then announces this to the public.
2. Price Determination: The company and its financial experts figure out how much the shares should cost. They also set a time frame for the offer.
3. Offer Period: Investors can buy the shares within a specific time period. This is when anyone interested can apply for the shares.
4. Allotment: After the offer period ends, the company checks how many shares people want to buy. If there is more demand than the available shares, the shares are allotted in a way that everyone gets a fair share.
5. Funds Raised: The company receives the money from selling these shares, which they use for their business needs.

The main goal of an FPO is to raise money by selling more shares to the public, helping the company grow or pay off debts.

Types of Follow-on Public Offers (FPOs)

There are two main types of Follow-on Public Offers (FPOs): Dilutive FPO and Non-Dilutive FPO. These two types of FPOs differ in the way they are structured and the impact they have on a company's shares and the existing shareholders.

Let’s take a deeper look at both types:

1. Dilutive FPO (New Shares Issued)

A Dilutive FPO happens when the company decides to issue new shares. This means that the total number of shares in the market increases. When new shares are created, the ownership percentage of existing shareholders is diluted or reduced. Essentially, each shareholder’s ownership gets smaller because the company is issuing more shares.

Example:

Let’s say you own 100 shares in a company, and the company decides to issue an additional 1,000 new shares. After the issuance, there are now 1,100 shares in total. Although you still own 100 shares, your percentage ownership in the company has decreased.

This type of FPO can affect the company's stock price. Since more shares are available in the market, the price of each share might decrease after the FPO. However, the funds raised by issuing new shares can help the company grow, expand, or pay off debt, which may increase its value in the long run.

2. Non-Dilutive FPO (Shares Sold by Existing Shareholders)

In a Non-Dilutive FPO, no new shares are issued. Instead, existing shareholders, like the company’s promoters or early investors, sell part of their shares to the public. This means the total number of shares in circulation remains the same, and no dilution of ownership occurs for the existing shareholders.

Example:

If the company’s promoters decide to sell 1,000 shares to the public, the total number of shares remains the same. The only difference is that the ownership structure may change, as new investors will now own some of the shares that were previously held by the promoters.

This type of FPO does not affect the market value of existing shares because no new shares are being created. However, it still allows the company to raise funds, but only the selling shareholders will benefit from the proceeds of the sale, not the company itself.

3. Rights Issue FPO (Offered Only to Existing Shareholders)

In a Rights Issue FPO, the company gives the existing shareholders the right to buy additional shares, usually at a discounted price. These shares are offered in proportion to the shares the investor already holds. This type of FPO is a way for companies to raise funds while giving current shareholders the first opportunity to buy more shares before they are offered to others.

Example:

If you own 100 shares in a company and the company offers a rights issue of 1 new share for every 2 shares you own, you can buy 50 additional shares at a discounted price.

The advantage of a Rights Issue FPO is that existing shareholders can maintain their ownership percentage by purchasing new shares. However, if shareholders choose not to buy the additional shares, their percentage ownership in the company will decrease.

4. Qualified Institutional Placement (QIP) FPO (For Institutional Investors)

A QIP FPO is when the company offers shares to qualified institutional buyers (QIBs), such as mutual funds, insurance companies, and pension funds, instead of the general public. These institutional investors are typically large investors with the financial expertise to evaluate and buy shares in large quantities.

Example:

The company may decide to issue 1,000,000 shares through a QIP, and only qualified institutional buyers can purchase them. This method is typically faster and easier for companies, as they don’t need to go through the complex process of offering shares to the public.

QIP FPOs usually don’t affect the retail investors or the public, and the shares are typically issued at a price that is agreed upon with the institutional investors. It’s a way for companies to raise money quickly from a select group of investors.

5. Public Offer FPO (Open to All Investors)

In a Public Offer FPO, the company offers shares to the general public, which can include individual investors and institutional investors. This is the most common type of FPO, and it can be either dilutive or non-dilutive depending on whether new shares are issued or existing shares are sold.

Example:

A company may decide to offer 1,000,000 shares to the public at a fixed price. Anyone can apply for the shares during the offer period, and if the shares are in demand, they may get allocated. This type of FPO can help the company raise funds for expansion, debt repayment, or other financial needs.

Follow-on Public Offerings (FPOs) in the Market

In the market, FPOs are a way for companies to raise more funds even after they have already gone public with an IPO. These offers are closely monitored because they can affect the company’s stock price and how investors feel about the company’s future.

Investors usually pay close attention to FPOs because they could present opportunities to buy shares at a discount or at a price that is better than the current market price. However, sometimes FPOs can also cause the stock price to fall if investors feel the company is struggling or overvalued.

Why does a Company need an FPO?

Companies use FPOs to raise funds for several reasons:

1. Expansion: A company might want to open new stores, introduce new products, or enter new markets. An FPO can provide the money needed for these projects.
2. Debt Repayment: Some companies use the funds raised from an FPO to pay off existing debts.
3. Improving Financial Health: If a company’s financial health is not very strong, it might use the funds raised to improve its balance sheet and reduce debt.
4. General Growth: Sometimes, companies simply need extra money to fund their regular operations and help them grow.

In each case, an FPO helps companies get the money they need to achieve their goals and continue running their business smoothly.

What Are the Follow-on Public Offer Guidelines?

The guidelines for FPOs are set by government and stock market authorities like the Securities and Exchange Board of India (SEBI). These guidelines ensure that companies follow fair practices when offering shares to the public and that investors are protected. Some key points include:

1. Public Disclosure: Companies must tell the public why they are doing the FPO and how they plan to use the funds.
2. Pricing: The company must disclose how the price of the shares was decided and whether they are offering the shares at a discount.
3. Offer Period: There must be a clear start and end date for the offer.
4. Transparency: The company must follow transparent processes to ensure fairness for all investors.

These rules help ensure that the process is fair and that investors understand the risks before they buy shares.

What Happens in an FPO?

During an FPO, the company sells its shares to raise money, either by issuing new shares (dilutive) or by allowing existing shareholders to sell their shares (non-dilutive). Once the FPO is over, the company receives the money from the sale, and the shares are listed on the stock exchange. The company's financial situation could improve if the FPO raises enough funds.

The stock price can be affected by how well the FPO goes. If there is a lot of demand for the shares, the price could rise. If demand is low, the price might fall.

What Are the Benefits of Follow-on Public Offers?

FPOs offer several benefits to companies and investors:

• For Companies: FPOs provide a way to raise large amounts of money quickly to fund projects, pay off debt, or improve financial health.
• For Investors: Investors can buy shares in the company at a potentially discounted price, especially if the FPO is priced lower than the market price.
• Increased Market Liquidity: FPOs can increase the number of shares available, making the stock more liquid and easier to trade.

A Follow-on Public Offer (FPO) is a way for companies to raise money by offering more shares to the public. Companies do this to fund growth, pay off debt, or improve their financial position. There are two types of FPOs: dilutive and non-dilutive, and each has its own impact on shareholders. For investors, FPOs can offer a chance to buy shares at a good price, but they also come with risks.

Investing in an FPO requires careful consideration of the company’s reasons for raising funds, its financial health, and the potential for future growth. As with any investment, it's important to research before deciding to participate.