Follow on Public Offering (FPO): A Detailed Exploration
When it comes to raising funds in the securities market, two terms often come up: IPO (Initial Public Offering) and FPO (Follow on Public
Offering). Most people are familiar with IPOs, as these are the first step for any company looking to raise public funds. However, FPOs are equally important but often less discussed. Recently, Adani Enterprises announced a massive FPO valued at ₹20,000 crore, which, pending shareholder approval, could become the largest FPO in Indian market history. This event has sparked renewed interest in the concept of FPOs and how they operate. In this article, we will dive deep into what FPOs are, how they differ from IPOs, and why companies utilize them.
What is a Follow on Public Offering (FPO)?
A Follow on Public Offering (FPO) is a process by which a company that is already listed on a stock exchange raises additional capital by issuing new shares or selling existing shares to the public. This is different from an Initial Public Offering (IPO), where a private company goes public by offering its shares to the public for the first time.
In simpler terms, an FPO is like a second or subsequent round of funding that a publicly listed company can use to raise capital after the IPO. In contrast, the IPO is the first time a company offers shares to the public and gets listed on the stock exchange. Once a company has gone through the IPO process and is listed, it can go on to raise further capital through FPOs.
Key Differences Between IPO and FPO
Though both IPOs and FPOs serve the purpose of raising funds, they differ in their structure, purpose, and timing. Let’s explore the key differences:
| Aspect | Initial Public Offering (IPO) | Follow on Public Offering (FPO) |
|---|---|---|
| Nature | The first sale of shares to the public | Subsequent sale of shares by a listed company |
| Objective | To list the company on the stock exchange and raise funds for the first time | To raise additional capital after being listed |
| Risk Level | Higher risk, as the company is unlisted and relatively unknown | Lower risk, as the company is already listed and more information is available |
| Pricing | Set by underwriters based on various factors | Generally offered at a discount to the market price to attract investors |
| Information Available | Limited information available on the company’s past performance | Detailed financial data available on the company’s operations and performance |
In summary, while both IPOs and FPOs involve selling shares to the public, an IPO is a company’s first sale of stock, whereas an FPO is a subsequent sale by an already listed company. The risks and information available in each scenario differ, which makes an FPO generally considered a safer investment than an IPO.
Types of FPO: Diluted and Non-Diluted
There are two main types of FPOs, depending on how the company’s shares are structured and offered to the public: Diluted FPO and Non-Diluted FPO. Understanding these types is crucial for investors to evaluate the impact of an FPO on their holdings.
1. Diluted FPO
A Diluted FPO involves the issuing of new shares to the public, which increases the total number of shares outstanding. This leads to a dilution of ownership for the existing shareholders because their percentage of ownership decreases with the introduction of new shares.
For example, if a company initially had 100,000 shares outstanding and decides to issue 10,000 new shares in a Diluted FPO, the total number of shares would increase to 110,000. As a result, the ownership percentage of the existing shareholders would reduce proportionately, because the new shareholders would now own part of the company as well.
Diluted FPOs are typically carried out when the company is looking to raise capital for expansion, debt repayment, or other growth objectives. By issuing new shares, the company receives the proceeds directly, which it can then utilize to meet its financial goals.
Impact on Shareholders
In a Diluted FPO, while existing shareholders see their ownership percentage decrease, the overall value of the company might increase if the raised capital is put to productive use. For instance, if the company uses the proceeds to fund growth initiatives, expand operations, or pay off debt, the overall financial health of the company could improve, potentially leading to an increase in the share price in the long run.
2. Non-Diluted FPO
A Non-Diluted FPO, on the other hand, does not involve the issuance of new shares. Instead, shares held by existing shareholders, such as promoters or early investors, are offered to the public. In this case, there is no increase in the total number of shares outstanding, and therefore, there is no dilution of ownership for the current shareholders.
Non-Diluted FPOs are often used by promoters or large shareholders to offload part of their holdings while increasing the company’s public float (i.e., the number of shares available for trading in the public market). This type of FPO is more about providing liquidity to the existing shareholders rather than raising capital for the company itself.
Impact on Shareholders
In a Non-Diluted FPO, since there is no increase in the total number of shares, the percentage ownership of existing shareholders remains the same. However, these FPOs can still have an impact on the share price, depending on market sentiment and the reason for the share sale. If large shareholders are selling a significant portion of their holdings, it could indicate a lack of confidence in the company’s future prospects, which may lead to a decline in the stock price.
Why Do Companies Opt for an FPO?
There are several reasons why a company might choose to issue an FPO, ranging from raising capital for business expansion to improving liquidity in the market. Let’s explore some of the key reasons:
1. Raising Capital for Growth and Expansion
One of the primary reasons for a company to issue an FPO is to raise capital for growth initiatives. This could include funding new projects, expanding into new markets, or increasing production capacity. By raising funds through an FPO, the company can finance its growth plans without taking on additional debt.
2. Reducing Debt
Another common reason for issuing an FPO is to reduce debt. Companies with high levels of debt might choose to issue new shares through an FPO and use the proceeds to pay off their debt obligations. This can improve the company’s financial health by reducing interest expenses and lowering the risk associated with high leverage.
3. Increasing Public Shareholding
In some cases, companies may issue an FPO to increase the proportion of shares held by the public. This is particularly relevant in markets where companies are required to maintain a certain level of public shareholding (e.g., 25% public float). By increasing public participation, the company can also improve liquidity, making it easier for investors to buy and sell shares in the market.
4. Providing an Exit Opportunity for Existing Shareholders
Non-Diluted FPOs, in particular, provide an opportunity for existing shareholders, such as promoters or pre-IPO investors, to sell a portion of their holdings and realize gains. These FPOs are often used when large shareholders want to reduce their stake in the company while providing liquidity to the public market.
5. Improving Market Perception and Price Discovery
Issuing an FPO can also help improve the company’s visibility in the market and enhance price discovery for its shares. By increasing the number of shares available for trading, the company can attract more institutional and retail investors, leading to better price discovery and potentially more favorable market valuations.
How Does an FPO Affect Investors?
For investors, participating in an FPO can present an opportunity to buy shares in a company they are interested in at a potentially lower price than the current market price. Let’s look at how FPOs impact investors:
1. Discounted Pricing
One of the key attractions of an FPO is that shares are often offered at a discount to the current market price. This is done to ensure that there is sufficient demand for the FPO, as investors are more likely to subscribe if they can acquire shares at a price lower than the market value.
For instance, if a company’s stock is trading at ₹500 per share, it may issue shares in an FPO with a price band of ₹450–₹480 per share. This provides investors with an opportunity to buy shares at a discount, which can lead to immediate gains if the market price remains higher than the FPO price.
2. Lower Risk Compared to IPOs
Investing in an FPO is generally considered less risky than investing in an IPO. In an IPO, the company is going public for the first time, and there is limited information available about its past performance and operations. However, in an FPO, the company is already listed, and investors have access to a wealth of information about its financial performance, management, and business prospects. This makes it easier for investors to make informed decisions and reduces the risk associated with the investment.
3. Impact on Share Price
The impact of an FPO on the company’s share price can vary depending on the type of FPO and the market’s perception of the offering. In the case of a Diluted FPO, the increase in the number of shares can lead to a temporary decline in the stock price due to the dilution of ownership. However, if the company uses the funds raised for productive purposes, such as expanding operations or reducing debt, the long-term impact on the stock price could be positive.
In contrast, a Non-Diluted FPO may have less impact on the stock price, as there is no change in the total number of shares outstanding. However, if large shareholders are selling a significant portion of their holdings, it could raise concerns about the company’s future prospects, leading to a decline in the stock price.
Conclusion: FPOs as a Strategic Financial Tool
Follow on Public Offerings (FPOs) are an important mechanism for companies to raise additional capital after they are listed on a stock exchange. Whether through a Diluted or Non-Diluted FPO, companies can raise funds for growth, reduce debt, or increase public shareholding, while investors have the opportunity to acquire shares at a discount to the market price.
For investors, FPOs offer a relatively lower-risk investment opportunity compared to IPOs, as more information is available about the company’s financial health and business prospects. However, as with any investment, it is important to carefully evaluate the specifics of the FPO, including the type of offering, the company’s reasons for issuing the FPO, and the potential impact on share price.
In recent times, with large companies like Adani Enterprises announcing massive FPOs, the spotlight is once again on this financial instrument as a strategic tool for both companies and investors in the capital markets.