What is FPO? Advantages, Disadvantages , IPO vs FPO

Businesses often require a consistent flow of capital to support various essential activities, such as expanding their operations or managing existing debts. Often, entrepreneurs find it challenging to solely rely on their personal savings to sustain their ventures. As a company’s value grows over time, so does the demand for capital, prompting them to explore avenues for raising funds from the broader public.

While a company can initially secure funds through an Initial Public Offering (IPO), the question arises: What happens when additional capital becomes necessary? This is where a Follow-On Public Offering (FPO) comes into play, offering a valuable solution for business owners to ensure they have the necessary financial resources to smoothly run their operations.

An FPO represents a stock market mechanism that enables a publicly traded company to issue additional shares, thereby attracting fresh investments from investors to meet their evolving financial needs.

What Is a Follow-On Public Offer (FPO)?

A Follow-On Public Offer (FPO) represents a specific type of public offering wherein a company that is already listed on a stock exchange decides to issue new shares of its stock to the general public. This option is typically chosen by companies that have previously raised capital through an Initial Public Offering (IPO) by introducing their shares to the market for the first time.

FPOs can be an attractive choice for companies with a proven track record of success and a dedicated group of investors willing to purchase additional shares. However, it’s important to note that FPOs can potentially dilute the ownership stake and earnings per share of existing shareholders, which is a critical factor that investors weigh when contemplating participation in an FPO.

Typically, companies opt for FPOs to secure additional funds for various purposes, including financing expansion initiatives, clearing outstanding debts, or supporting strategic acquisitions. The process involved in conducting an FPO closely resembles that of an IPO, requiring companies to prepare a comprehensive offering document and allocate shares to interested investors before officially listing them on the stock exchanges.

Understanding How a Company Goes Public: IPO

When a company decides to go public, it typically means that they are launching their Initial Public Offering (IPO). This significant financial event transforms the company into a publicly traded entity, with ownership shared among a wide range of investors. The primary reasons for a company to go public include expanding their market presence and raising additional capital. Additionally, venture capitalists who have invested in the company may view going public as an exit strategy to realize returns on their investments.

The process of going public often begins with engagement with investment banks, which play a pivotal role in this transition. These banks take on the responsibility of underwriting the IPO, which involves determining the price and quantity of shares that will be publicly offered, while also conducting due diligence to ensure all necessary disclosures are made. As a result of going public, previously privately held shares are converted into publicly traded shares, allowing a broader range of investors to participate in the company’s ownership.

How a Follow-On Public Offer (FPO) works when a company issues additional shares to investors:

1. Intermediaries Appointment: The company looking to conduct an FPO appoints intermediaries such as investment banks and underwriters to assist in the process. These intermediaries play crucial roles in pricing and facilitating the offering.
2. Offer Document: The company prepares and submits an offer document to the Securities and Exchange Board of India (SEBI) for approval. This document contains comprehensive information about the FPO, including details about the FPO size, lot size (the number of shares in each unit), and other pertinent information.
3. Pricing: After SEBI approves the offer document, the company determines the price per share for the FPO. This price is crucial, as it represents the amount at which investors can apply for shares within a lot. It is based on various factors, including market conditions and the company’s valuation.
4. Opening and Closing: The company opens the FPO for a specified period during which investors can place their bids or applications. This is the time when investors express their interest in purchasing shares at the offered price. Once the designated bidding period concludes, the FPO is closed.
5. Allotment and Listing: Following the closure of the FPO application period, the company processes the allotment of shares to investors who applied. Investors are informed of the number of shares they have been allocated, along with the final offer price. Subsequently, these newly issued shares are officially listed on the stock exchanges, making them available for trading in the secondary market.

It’s important to note that this process may vary by jurisdiction and the specific regulations in place. Additionally, the company and its intermediaries must adhere to strict compliance and disclosure requirements throughout the FPO process to ensure transparency and fairness to investors.

Two primary types of Follow-On Public Offers (FPOs), each with distinct implications for shareholders and the company:

1. Dilutive FPO:
   • In a Dilutive FPO, the company issues additional shares of its stock to the public.
   • This results in an increase in the total number of outstanding shares available in the market.
   • Because the outstanding shares increase, the ownership percentage of current shareholders (existing investors) is diluted or reduced. They now own a smaller portion of the company.
   • The earnings per share (EPS) also tend to decrease because the company’s profits are divided among a larger number of shares.
   • Companies often opt for dilutive FPOs when they need to raise significant amounts of capital for various purposes such as expansion, debt repayment, or acquisitions.
2. Non-Dilutive FPO:
   • In a Non-Dilutive FPO, the company itself does not issue new shares to the public.
   • Instead, existing shareholders, which can include institutional investors or company insiders (such as founders or executives), sell their shares to the public.
   • This sale of existing shares does not alter the total number of outstanding shares or the ownership percentage of the current shareholders. The company’s ownership structure remains unchanged.
   • Non-dilutive FPOs are often used as an exit strategy for existing investors, allowing them to realize the value of their investments without affecting the company’s capital structure.
   • Such offerings can also provide liquidity to existing shareholders and enhance the company’s stock’s trading liquidity.

The choice between a dilutive and non-dilutive FPO depends on the company’s specific financial needs, its existing ownership structure, and the preferences of its shareholders and management. Each type of FPO has its advantages and considerations, and the decision is typically made after careful evaluation of these factors.

How to apply for FPO?

The procedure for applying for shares in an FPO. Here’s a breakdown of the steps:

1. Eligibility: Anyone above the age of 18 who has a PAN card (Permanent Account Number) and a Demat account is eligible to apply for shares in an FPO.
2. Broker or ASBA Service: To participate in an FPO, investors can choose to work with a stockbroker or use a bank’s Application Supported by Blocked Account (ASBA) service. Both methods enable investors to apply for FPO shares.
3. Demat Account: Having a Demat account is essential for holding and trading securities in electronic form. It serves as the repository for the shares you purchase.
4. Application: Investors need to submit their application for FPO shares. This can typically be done through the broker’s trading platform or by filling out the application forms provided by the bank’s ASBA service.
5. Payment: Investors must specify the number of shares they wish to apply for and the corresponding payment. The payment can be made using various methods, including net banking, a check, or other electronic payment methods supported by the ASBA service.
6. PAN Card: A PAN card (issued by the Income Tax Department in India) is required as it serves as a unique identification number for tax purposes.
7. Retails Individual Investors (RIIs): Investors can apply under the Retail Individual Investors (RIIs) allocation, which is typically reserved for individual retail investors. This allocation may have certain benefits, such as a lower minimum investment requirement.
8. Allotment: After the FPO subscription period ends, shares are allotted based on the number of shares applied for and the availability of shares. The allotment process is overseen by the company issuing the FPO.
9. Listing and Trading: Once the FPO shares are allotted, they are officially listed on the stock exchange. Investors can then trade these shares on the secondary market through their Demat accounts.

It’s important for investors to carefully review the FPO prospectus and conduct their research before applying for FPO shares. Additionally, the specific application process and requirements may vary depending on the company and the stock exchange where the FPO is listed, so investors should refer to the company’s FPO documentation for detailed instructions.

IPO vs FPO

Aspect	IPO (Initial Public Offering)	FPO (Follow-On Public Offering)
Full Form	Initial Public Offering	Follow-On Public Offering
Timing	Occurs when a company goes public for the first time.	Occurs after a company is already publicly listed and has had an IPO.
Purpose	Raises capital for the company’s growth, expansion, or other corporate needs.	Raises additional capital for the company’s ongoing operations, expansion, debt repayment, or other purposes.
Share Issuance	The company issues new shares to the public.	The company may issue new shares (dilutive FPO) or existing shareholders sell their shares to the public (non-dilutive FPO).
Ownership Change	Results in a significant change in ownership structure.	May or may not result in an ownership change, depending on whether it’s dilutive or non-dilutive.
Listing Requirement	A company must meet listing requirements to conduct an IPO.	Already listed on a stock exchange due to the prior IPO.
Financial Disclosure	Requires detailed financial disclosures in the IPO prospectus.	Requires updated financial disclosures but may not be as extensive as in an IPO.
Market Impact	Often generates significant market attention and volatility.	Tends to have a more subdued market impact compared to IPOs.
Underwriters	Investment banks play a critical role as underwriters in an IPO.	Investment banks may also be involved in FPOs, especially in pricing and structuring.
Ownership Dilution	Typically results in ownership dilution for existing shareholders.	May result in ownership dilution (dilutive FPO) or have no impact on ownership (non-dilutive FPO).
Earnings Per Share (EPS)	Generally affects EPS as the number of shares increases.	May impact EPS, depending on whether it’s dilutive or non-dilutive.
Regulatory Oversight	Subject to extensive regulatory scrutiny and approval by regulatory bodies.	Still subject to regulatory oversight but may involve less scrutiny compared to an IPO.

IPOs and FPOs serve different purposes and have varying implications for companies and investors. The choice between the two depends on the company’s financial needs and its stage of development in the public markets.

What Are the Advantages FPO

At-The-Market (ATM) offerings have gained popularity as a modern financial approach that provides several advantages for companies looking to raise capital. Here’s a closer look at the advantages of ATM offerings:

1. Flexibility:
   • ATM offerings offer flexibility by allowing companies to issue shares gradually over time based on real-time market conditions and investor demand.
   • This flexibility helps mitigate the risk of a low subscription rate since the company can adjust the pace of share issuance in response to market dynamics.
2. Market Price:
   • One of the key advantages of ATM offerings is the ability to offer shares at the current market price.
   • This ensures that the company is capturing the most favorable valuation for its shares, potentially resulting in better investment returns for both the company and investors.
3. Cost-Effective:
   • ATM offerings are typically more cost-effective than traditional Initial Public Offerings (IPOs) or Follow-On Public Offerings (FPOs).
   • Unlike IPOs that involve substantial expenses related to underwriting fees, roadshows, and other investment banking services, ATM offerings often do not require the same level of involvement from investment bankers. This can lead to lower overall expenses for the company.
4. Efficiency:
   • ATM offerings can be an efficient way to access capital when needed, without the need for a time-consuming and resource-intensive IPO or FPO process.
   • Companies can tap into the market more quickly and with less administrative burden.
5. Reduced Market Impact:
   • Since shares are gradually introduced into the market, ATM offerings can have a reduced impact on the stock’s price compared to a single large issuance in an IPO or FPO.
   • This can be beneficial for maintaining stable stock prices and reducing potential market volatility.
6. Continuous Access to Capital:
   • ATM offerings provide companies with a mechanism for continuous access to capital over an extended period, which can be particularly advantageous for businesses with ongoing capital needs.

It’s important to note that while ATM offerings offer these advantages, they may not be suitable for all companies or situations. The choice between an ATM offering and traditional equity offerings like IPOs or FPOs depends on a company’s specific goals, capital requirements, and market conditions. Companies should carefully evaluate their financing options to determine the most appropriate approach for their needs.

What Are the Disadvantages of FPO

there are disadvantages associated with At-The-Market (ATM) offerings, and it’s important for companies to consider these factors when deciding on their capital-raising strategy. Here are some of the key disadvantages of ATM offerings:

1. Ownership Dilution:
   • One of the primary drawbacks of ATM offerings is the dilution of ownership for existing shareholders. As the company issues additional shares into the market, it effectively reduces the ownership percentage of current shareholders.
   • Shareholders may find their proportional stake in the company diminished, potentially impacting their control and influence.
2. Limited Control Over Pricing:
   • In ATM offerings, shares are typically issued at the current market price, which is determined by market forces and investor sentiment.
   • The company has limited control over the pricing of shares, and if the current market price is considered overvalued, it may lead to a lower subscription rate as investors may be less inclined to purchase shares at a premium.
3. Market Volatility:
   • The announcement of an ATM offering can lead to increased market volatility. Investors may react negatively to the news of additional share issuance, which can disrupt supply and demand dynamics in the market.
   • This volatility can have a negative impact on the company’s share price, potentially affecting investor sentiment and confidence.
4. Perceived Negative Signal:
   • Some investors may interpret an ATM offering as a sign that the company is in need of capital due to financial difficulties or negative cash flow.
   • This perception can lead to decreased goodwill and investor skepticism, which may affect the company’s stock performance and market reputation.
5. Administrative Overhead:
   • While ATM offerings can be cost-effective compared to traditional equity offerings, they still involve administrative overhead and regulatory compliance requirements.
   • Companies must navigate the complexities of continuous share issuance, maintain proper documentation, and adhere to regulatory guidelines.
6. Market Timing Risk:
   • The success of ATM offerings depends on market conditions and investor sentiment. If market conditions are unfavorable or sentiment is negative, the company may not achieve its desired capital-raising objectives.

Despite these disadvantages, ATM offerings offer benefits in terms of flexibility and cost-effectiveness. Companies need to carefully assess their specific financial needs, market conditions, and the impact on existing shareholders when deciding whether to pursue an ATM offering as part of their capital-raising strategy.

Conclusion

FPOs indeed serve as a valuable mechanism for companies to raise additional capital after their Initial Public Offerings (IPOs). This opportunity allows companies to fund their growth and strategic initiatives while also offering investors the chance to participate in the company’s continued success.

It’s crucial for both companies and investors to carefully consider the advantages and risks associated with FPOs. Companies should assess their capital needs and market conditions, while investors should conduct thorough research and due diligence to make informed investment decisions. By doing so, FPOs can be a win-win situation, benefiting both companies and investors in the long run.