What is FPO? Learn FPO Examples, Full Form, Types & Advantages in the Stock Market
During the 1980s and 1990s, policy planners realized that a well-developed capital market is essential for sustainable growth in an emerging market economy like India. A package of reforms aimed at enhancing market quality in terms of effectiveness, transparency, and pricing policies was introduced shortly. As a result, IPO and FPO came into the picture. The IPO and FPO full form is Initial Public Offering and FPO is Follow on Public Offer.
The Adani FPO worth ₹20,000 Cr was making rounds in the tabloids as Adani Enterprises FPO was called off by the Adani Group. Led by the billionaire Gautam Adani. This unprecedented move came shortly after the Hindenburg report alleging fraud and manipulation against the Adani Group. Therefore, this caused havoc among its listed companies. So, many of you might have questions as to why or how it happened.
So, this blog will cover FPO basics, why companies choose them, and what to consider before investing.
What is FPO in Shares?
The FPO full form in share market is Follow on Public Offer. The FPO meaning is the issuance of additional shares of a company that is already listed on a stock exchange. Thus, the company uses FPO to raise additional capital for expanding operations, reducing debt, or achieving any other purpose. For example, suppose a company like Tata Motors Ltd. Thus, the company initially raised capital by issuing an Initial Public Offering (IPO) and has been listed on a stock exchange; it may later opt for an FPO to raise more funds from the market.
How Follow On Public Offer Works?
The share price during the initial public offering (IPO) is arrived at based on the company’s performance, and the company hopes to achieve the desired price per share during the IPO listing. On the other hand, FPO share prices are market-driven since the shares are already trading on the stock exchange. Therefore, this helps the investor understand the company’s valuation before buying.
Companies can opt for FPOs for various reasons, such as raising funds to address debt or facilitating acquisitions. Existing shareholders might also seek to sell their holdings, while some companies use FPOs to raise capital for debt refinancing. Investors must do their research by evaluating the company’s motives behind the FPO before considering participation.
Why is an FPO Important for Companies?
FPO in the share market can be important for companies for the following reasons:
- Raise Additional Capital: FPOs may allow companies to raise additional capital from the stock market to fund their growth plans, expansion, and research and development activities.
- Diversify Funding Sources: Encourages companies to diversify funding sources beyond traditional bank loans and private investments.
- Enhance Liquidity: By going public and conducting an FPO, companies can enhance the liquidity of their shares. Therefore, this makes it easier for shareholders to buy and sell their holdings.
- Improve Market Visibility: FPO can help increase a company’s market visibility. Thus, this can attract new investors, customers, and business opportunities.
- Reduce Debt: It can also help companies reduce debt by using the proceeds to pay off existing debt or refinance at lower interest rates.
Why is an FPO Important for Investors?
Follow on Public Offers or FPO in the stock market can be important for investors for several reasons, including:
- Opportunity to Invest in an Established Company: FPOs allow you to invest in companies that have already undergone an IPO.
- Potential for Capital Gains: Can offer you the potential for capital gains as the stock price may increase in the long run.
- Diversification of Investment Portfolio: Investing in FPOs can help diversify an investor’s portfolio by adding exposure to a different company or sector.
- Information Transparency: Companies conducting FPOs must disclose financial information, providing investors with more information.
- Possible Dividend Payouts: If the company issuing the FPO is profitable, investors may receive dividend payouts and potential capital gains.
Types of Follow On Public Offers
However, companies can issue different types of Follow on Public Offerings (FPOs) to raise capital from the public. Here are some of the common types of FPOs:
- Dilutive FPO: Diluted follow on offerings can happen when a company issues additional shares to the public, diluting existing shareholders’ ownership stake. As a result, the number of outstanding shares increases due to dilution. Companies typically use this type of FPO to raise a large amount of capital quickly. Thus, the direct infusion of cash during this FPO gives a good company outlook in the long term.
- Non-Diluted Follow on Offering: Also called secondary market offerings. In this type of FPO, a company may not issue new shares since it may offer existing shares held by insiders, founders, or early investors to the public. Thus, this type of FPO may not dilute the ownership stake of existing shareholders. Since no new shares are issued, the company’s EPS remains unchanged.
- At-the-Market (ATM) Offering: An At-the-Market (ATM) Offering can give the issuing company the power to raise capital according to their needs. A company can completely refrain from sharing the stocks if they aren’t satisfied with the stock’s price. Additionally, ATM offerings are typically less expensive and time-consuming than traditional public share offerings. This is because they may require less regulatory paperwork and legal fees.
FPO Example in India
FPO is common in the investment world as it may offer an easy means for companies to raise their equity. Let’s understand how FPO works through a classic example of a government-owned company, IRFC.
IRFC or Indian Railway Finance Corporation is a public sector undertaking that provides financial support to Indian Railways.
In January 2020, IRFC made its initial public offering (IPO), raising approximately ₹4,633 crores ($636 million). Investors also welcomed the FPO, oversubscribing the issue 3.49 times.
Less than a year later, in December 2020, IRFC announced its FPO shares to raise an additional ₹1,400 crores ($189 million). On the announcement day, the company priced the FPO at ₹26 per share, which represented a discounted 4.63% to the stock’s closing price.
Investors also welcomed the FPO, oversubscribing the issue 3.49 times. Therefore, the company intended to use the funds raised through the FPO to support its lending operations and general corporate purposes.
IRFC’s FPO less than a year after its IPO demonstrates the company’s strong financial position and investor confidence. It also highlights the potential benefits of FPOs for companies looking to raise additional funds and for those who are looking to invest in established companies.
What are the Factors Affecting the FPO?
Several factors can influence a Follow-on Public Offer (FPO), impacting its success and reception in the financial markets. Some key factors include:
- Market Conditions: The overall state of the stock market and economic conditions can significantly affect the success of an FPO. Bullish markets may provide a favourable environment, while bearish trends could pose challenges.
- Company Performance: Investors closely evaluate the financial health, profitability, and growth prospects of the company. Strong performance and a positive outlook can attract investor confidence.
- Industry Trends: The performance of the industry to which the company belongs plays a crucial role. Industry-specific factors, trends, and market sentiment can impact the reception of the FPO.
- Regulatory Environment: Changes in regulations, compliance requirements, or legal developments can influence the decision to launch an FPO and affect investor perception.
Why Do Companies Issue Follow On Public Offering?
After listing on a stock exchange, companies can actively issue Follow on Public Offerings (FPOs) to raise additional capital from the public. This additional capital can be used for various purposes. Funding expansion plans, making acquisitions, paying off debt, or investing in new projects are some examples. Larger and established companies often do FPOs with a higher market capitalization. Thus, FPOs can also help increase the liquidity of a company’s shares and provide an exit strategy for existing investors.
How to Apply for FPO?
Are you interested in investing in a company that has already gone public? Then a Follow on Public Offer (FPO) might be your right choice!
Hence, we have listed some of the pointers to guide you on how to apply for an FPO:
- Do Your Research: Before investing in any company, it is essential to do your due diligence. Thus, look at the company’s financial statements, management team, growth prospects, and competitors before investing.
- Decide on the Number of Shares to Buy: Once you have reviewed the information, determine how many shares you want to purchase. You can base this decision on your budget, investment goals, and assessment of the company’s potential.
- Open a Demat Account: To apply for a Follow on public offer, you need to have a Demat account. You can easily open one with any registered depository participant if you don’t have one.
- Place Your Order: After opening a Demat account, place your order through your broker or the online portal of your Demat account. Also provide your PAN number, bank details, and other necessary information to complete the application process.
- Wait for Allotment: Once you have placed your order, wait for the allotment of shares. Thereafter, the company will issue shares based on the number of shares you have applied for.
Benefits of FPO
An FPO, or follow on public offering, is a type of stock offering in which a company issues new shares of stock to the public after it has already gone public through an initial public offering (IPO). The benefits of an FPO are listed below:
FPO Benefits For Companies:
- Raising Capital: Companies often conduct FPOs to generate additional capital for operations, research and development, or expansion.
- Enhancing Liquidity: By issuing more shares of stock, an FPO can increase the number of shares available for trading on the public markets. This can increase the liquidity of the stock, making it easier for investors to buy and sell shares.
- Increasing Public Awareness: An FPO can raise a company’s profile and increase public awareness of its products or services. This could attract new customers and investors.
- Improving Financial Flexibility: With an FPO, a company can use the proceeds primarily to pay down debt or acquire companies, thus increasing its financial flexibility.
FPO Benefits For Investors:
- Access to Established Companies: FPOs allow you to invest in companies that have already gone through an IPO and demonstrated a track record of performance. This can be less risky than investing in newly listed companies.
- Potential for Capital Gains: If the company’s performance continues to be positive, the share price may increase after the FPO, offering you the potential for capital gains.
- Enhanced Liquidity: FPOs often increase the number of shares available for trading, leading to improved liquidity. This makes it easier for you to buy and sell your shares if needed.
- Lower Price Discovery Risk: Compared to IPOs, FPOs may offer shares at a more realistic price due to existing market data and analysis. This can potentially reduce the risk of overpaying for the shares.
- Reduced Fees: In some cases, FPOs may offer shares at a discount to the current market price. This can be particularly beneficial if you are looking to invest a large amount of money.
Reasons to Invest Through Follow On Public Offer
Here is a list of the following reasons that you might want to consider while investing through FPO:
- Unlike an IPO, investors in an FPO can benefit from having prior knowledge about the company, including insights into its management, business practices, and historical performance on the stock market.
- In an FPO, companies issue shares at slightly lower prices than those traded on the stock market. This can provide investors with the opportunity to purchase shares at a discount and subsequently resell them in the secondary market, creating a relatively risk-free profit.
- Arbitrage trading is a common strategy among investors participating in FPOs. By acquiring shares at a lower FPO price and selling them at a premium in the market, investors can capitalize on price differentials to generate profits.
Who Should Invest in FPO?
Investing in FPO (Follow on Public Offering) can be a wise choice if you’re looking for a profitable investment opportunity. Notably, companies that have already gone public and have a good track record of performance typically offer FPOs. For those who are willing to have a long-term investment horizon can consider investing in FPOs. Thus, FPOs can diversify your portfolio and yield higher returns.
However, conducting thorough research and analysing the company’s financials and prospects is important before investing.
What Are the Advantages of At-The-Market (ATM) Offerings?
At-the-market (ATM) offerings offer various benefits, including minimal market impact. Companies can swiftly raise capital without having to announce the offering. Additionally, ATM offerings generally entail lower costs compared to traditional follow-on offerings and demand minimal management engagement.
What Are the Disadvantages of At-The-Market (ATM) Offerings?
ATM offerings typically involve smaller amounts of capital compared to traditional follow-on offerings. Therefore, if a business aims to raise a substantial capital sum, this may not be the preferred method. Additionally, the pricing is subject to market fluctuations.
FPO vs IPO
Don’t confuse FPOs (Follow-on Public Offerings) with the Initial Public Offering (IPO) of equity to the public. IPO vs FPO has been in a constant tussle since capital markets have evolved. So, when a company decides to go public and raise funds from the market, it has two primary options. These are Initial Public Offering (IPO) and a Follow on Public Offering (FPO). Though both involve the public sale of a company’s shares, there are notable distinctions between an FPO and an IPO.
Let’s have a look at the differences between FPO vs IPO.
| Characteristics | IPO | FPO |
|---|---|---|
| Meaning | The first time a company’s shares are sold to the public. | When a company that has already gone public decides to issue and sell additional shares to the public. |
| Stage of Company | The company is not listed on the stock exchange | The company is already listed on the stock exchange |
| Purpose | To raise capital for the first time. | To raise additional capital for expansion or debt repayment. |
| Price discovery | Fixed or variable price range | The price fluctuates due to the increasing and decreasing of shares. |
| Share Value | Can sometimes be a little expensive as per the company’s valuation | Discounted share prices because the value of the company is further diluted |
| Company Share Capital | The share capital can increase because of the issuance of fresh capital to the public for the first time. | The share capital can increase during a dilutive FPO, while it remains the same during a non-dilutive FPO. |
| Risk | Riskier than FPOs, as the company is relatively unknown and there is uncertainty about how the market will respond to its shares. | Less risky as the company is already established and has a track record in the market. |
To Wrap It Up…
Therefore, investing in an FPO in the stock market can be a lucrative option. They can be an attractive investment opportunity for those who want to diversify their portfolios & yield significant returns with smallcase. smallcase offers an excellent opportunity for portfolio investing!
Happy investing!
FAQs
The full form is Follow on Public Offer. The FPO meaning is the issuance of additional shares of a company that is already listed on a stock exchange.
The main difference between an IPO and an FPO is the timing of the offering. IPO is when for the first time a company issues its shares to the public. While FPO is the additional shares of a company.
It can affect an investor by diluting their ownership stake in the company and by lowering the stock price.
After a Follow-on Public Offer (FPO), newly issued shares are listed on the stock exchange. The company receives capital from the sale, which can be used for various purposes outlined in the offering.
The FPO issue price is typically set below the market price to attract more subscribers. Lower demand for listed shares can subsequently reduce the market price, and level it with the FPO price.
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