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What is FPO?

ICICIdirect 11 Mins 06 May 2024

Recently, we saw one of India's biggest FPOs getting successfully subscribed. Investors made money in the process. If you missed the bus because you were unaware of the investment option, let us change that. In this article, we discuss everything you should know about FPO.

What is FPO?

FPO stands for Follow-on Public Offer. Let us clear one thing before moving forward - it is different from IPO (Initial Public Offer). By the end of this article, you will know how it is different from an IPO. 

Coming back to FPO. It is a process through which a company that is already listed on a stock exchange (via IPO) issues new shares to the public or existing shareholders to raise additional capital. One of the main reasons for companies to come with FPO is fundraise - companies use FPO to raise funds for various purposes, such as expansion, debt repayment, funding new projects, or acquiring other companies.

Types of FPO

At a broad level, you will see two types of FPO in the market. Let us look at them:

Dilution FPO: In this type of FPO, the company issues additional shares to the public. It dilutes the ownership stakes of existing shareholders. Since the total number of shares outstanding increases, the ownership percentage of existing shareholders is diluted. Companies may opt for dilution FPOs to raise capital for expansion, acquisitions, debt reduction, or other corporate purposes.

Imagine a company has 1 crore shares outstanding and announces a dilutive FPO where they issue 20 lakh new shares. The total number of outstanding shares becomes 1.2 crore. Consequently, the ownership percentage of existing shareholders for every share they hold decreases, and the EPS might be affected if profits don't rise proportionately.

Non-Dilution FPO: In a non-dilution FPO, existing shareholders sell their shares to the public, and the proceeds go to the selling shareholders rather than the company itself. This type of FPO does not increase the total number of shares outstanding and hence, does not dilute existing shareholders' ownership.

Take the same example - a company has 1 crore shares outstanding, and some major shareholders decide to sell 20 lakh of their shares through a non-dilutive FPO. The company does not create new shares - it is just the ownership of those 20 lakh shares that are changing hands from existing to new investors. The total number of outstanding shares remains constant.

How does an FPO work?

Let us know look at how the FPO process works. Here are the steps in the process:

  • Company's Decision: The company's board of directors decides to raise capital through an FPO. They will determine the amount of capital needed and the number of new shares to be issued.
  • Appointing Lead Managers: Investment banks or financial institutions are appointed as lead managers to handle the FPO process.
  • Due Diligence and Legal Processes: The lead managers conduct due diligence on the company's financials and prepare legal documents like the FPO prospectus.
  • Regulatory Approval: The FPO prospectus and other documents require approval from market regulators like the Securities and Exchange Board of India (SEBI) in India.
  • Marketing and Investor Outreach: The lead managers and the company work together to create marketing materials and reach out to potential investors, including institutional investors and the public.
  • Offer Price Determination: The offer price for the new shares can be determined through various methods, such as book building or a fixed price offering.
  • Book Building: This method involves collecting bids from potential investors at different price points. The final offer price is set based on investor demand.
  • Fixed Price Offering: The company sets a fixed price for the new shares upfront.
  • Subscription Period: The FPO opens for subscription, and investors can submit bids or applications to buy the new shares.
  • Share Allotment: Once the subscription period closes, the company and lead managers will allot shares to successful investors based on their bids or applications. This might involve a pro-rata allotment if the demand exceeds the available shares.
  • Listing and Trading: The new shares issued through the FPO are listed on the stock exchange alongside the company's existing shares. Investors can then trade these shares freely on the exchange.

Examples of recently launched FPOs

FPOs are not as frequent as IPOs, but we have seen some in recent years. In this section, we look at some of them to help you understand more about them.

IRFC: The company came with its IPO in January 2020, and in December 2020, IRFC announced its FPO shares to raise an additional Rs 1,400 crore. On the announcement day, the company priced the FPO at Rs 26 per share, which represented a discounted 4.63% to the stock’s closing price. It was a successful FPO, as it was oversubscribed 3.49 times.

Ruchi Soya: It opened for subscription in March 2022. The company raised Rs 4,300 crore via the FPO. The issue got subscribed 3.60 times, and investors made a profit of 36% on the listing day.

Yes Bank: The bank came with its FPO in July 2020 with a total issue size of Rs 15,000 crore - the biggest till that time. The price band at that time was Rs 12 to Rs 13. The issue failed to subscribe completely - it subscribed only 93%. 

Vodafone Idea FPO: Vi came with India's biggest FPO of Rs 18,000 crore. The FPO sailed through with subscription at 6.36 times. The FPO opened at a 9% premium on the day of the listing.

Difference between FPO and IPO

Here are all the points of difference between an IPO and an FPO you should know as an investor:

Feature Initial Public Offering (IPO) Follow-on Public Offering (FPO)
Definition The first sale of stock by a private company to the public. Subsequent issuance of shares by a public company after the IPO.
Purpose Raises capital for the company's expansion, debt repayment, or other business needs. Raises additional capital for the company's expansion, acquisitions, or to meet financial obligations.
Company Type Typically involves privately held companies transitioning to public ownership. Involves already publicly traded companies.
Dilution of Ownership Generally results in dilution for existing shareholders as new shares are issued. May dilute existing shareholders' ownership, though not as significantly as in an IPO.
Market Perception Often viewed as riskier by investors due to limited historical financial data and uncertainty about future performance. Generally perceived as less risky since the company is already established in the public market.
Timing Can occur at any stage of a company's growth, typically when it's seeking substantial funding for expansion. Usually occurs after a company has been public for some time and needs additional capital for various purposes.
Prospectus A detailed prospectus outlining the company's business model, financials, risks, and management team is required. While not always required, companies may choose to provide supplemental information to investors.

Before you go

Follow-on Public Offerings (FPOs) play a key role in the capital markets, allowing publicly traded companies to raise additional capital for growth, expansion, or strategic initiatives. By issuing new shares to the public, companies can access funds to finance various corporate objectives while providing investors with opportunities to participate in their growth story.

We hope you learned something new today. Next time, when you see a company with its FPO - who would be better prepared to decide if you want to apply for it or not. 

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