A company needs funds to run, similar to how a human needs food and water. Companies generate funds from two sources: owned funds, i.e., equity, and borrowed funds, i.e., debt. Furthermore, the company has two ways to generate funds through equity: IPO and FPO.
Follow-on Public Offer, popularly known as FPO, is a process by which a company already listed on the stock exchange issues new shares to the public or the existing shareholders or promoters. A company can only go for an FPO after the process of its IPO is completed and the company has decided to raise more capital.
The two major reasons to raise FPO are,
- Raise additional capital for the company
- Reduce the existing debt of the company
Furthermore, some companies raise additional funds to expand their company plans and to spread themselves in the market.
Follow-on Public Offers are a good option for strong companies with a consistent record of success where investors are willing to buy their shares.
Types of FPO
There are two types of FPO in the share market:
- Diluted FPO
As the name suggests, Diluted FPO is a method where the company issues an additional number of shares, keeping the value of the company the same. This way the earnings per share and the share price of the company reduces. - Non-diluted FPO
Non-diluted FPO is a method where the existing shareholders of the company sell their shares to the public and the money goes directly to the holders. This type does not affect the earnings per share.
How does an FPO in the share market work?
To raise additional capital for expansion or to reduce debt, a company needs to undertake the following steps to issue an FPO,
- Regulatory Approvals
The first step to bring any change in a company is to take necessary approvals from regulatory bodies such as SEBI. - Appoint intermediaries
The company is required to appoint an intermediary to help in raising an FPO. An intermediary such as an underwriter or investment banker, will help in assisting the procedure. They will help you decide the price of the new shares and understand the investor’s demand, the market conditions, lot size, etc… - Prepare an Offer Document
Now the company needs to prepare an offer document to raise the FPO and file it with SEBI. The document will contain detailed information about the offer including the reasons for raising funds, the number of shares that are to be issued, the price band, and the use of proceedings received. - Pricing
After receiving approval from SEBI, the company sets a price for the new shares. The company offers a price range within which the investor can bid for the shares. After which the final price is decided. Generally, the price band for FPO is lower than the market price to attract more investors. - Offer Period
Investors can make offers for the shares during such a bidding period. - Allotment
After the closing of the FPO application, they allot shares to investors who applied along with the final price. - Listing
After the whole procedure to raise a Follow-on Public Offer is completed, the new shares are now listed on the stock exchanges.
Benefits of Follow-on Public Offer
Apart from raising additional capital to run the company smoothly, there are certain more benefits of raising an FPO for the company,
- Capital raising
The first of course is capital raising. FPO raising additional money quicker than an IPO, as the company has already complied with most of its regulatory requirements. - Debt Reduction
Follow-on Public Offer helps the company reduce its debts as the capital raised is used to pay off high-interest-rated debts. This further helps the company to improve its balance sheets. - Improved liquidity
The number of shares in the market increases with the rise of FPO and helps the investors to trade better. This helps in improving liquidity in the market. - Expansion
Additional funds raised help in expanding the business and diversifying into new business lines. The equity base of the company is also diversified. - Goodwill
Raising an FPO in the share market helps in building reputation as it indicates better growth and performance of the company.
Difference between an IPO and an FPO
| Basis | IPO | FPO |
| Meaning | When the company raises shares for the first time in the public | When a company already listed raises additional capital by issuing new shares to the public |
| Price | Fixed or variable price range | The price band depends upon market situations and the number of shares to be issued |
| Share capital | Share capital increases as fresh shares are issued to the public | Increases in dilutive FPO Remains same in non-dilutive FPO |
| Risk | High-risk | Low-risk |
| Reasons | To introduce the company to public To facilitate trade To raise capital for future | To raise additional capital Debt reduction Expansion |
To conclude, a Follow-on Public Offer is an offer to the public to subscribe to the shares of the company after its initial public offering. FPO in the share market helps in reducing debts, raising additional funds, and in expansion and building image.
Frequently asked questions
- What is an FPO?
FPO – Follow-on Public Offer is an offer by the company to the general public to subscribe to the shares of the company after its initial public offering. - Which is better, IPO or FPO?
The choice of what’s best depends upon the risk level and goals of the investors. For companies, it depends, if the company wants to raise funds and go public, the initial offering will be an IPO and if the company has already gone public and wants to raise additional capital, the choice is FPO - How do I apply for an FPO?
The process to apply for FPO is the same as for IPO. It can either be done by the stock broker or directly by your demat account by making an offer for shares of the company at an indicative price under the price band.