What is FPO: Meaning, Types, Benefits & How it Works?

What happens when more capital is needed during the period? This is where Follow-on Public Offer(FPO) becomes important. As businesses grow, their financial needs often increase, whether for expansion, debt repayment, or new investments. While the initial funding may come from a private equity fund or an initial public offering (IPO).

FPOs can improve additional funds by issuing more shares to already publicly indexed businesses. Unlike an IPO, that is the first time a company offers stocks to the general public, an FPO allows companies to re-input the capital markets to finance further growth or business desires and is a vital tool for companies looking to enter has evolved and raised capital without relying entirely on debt.

In this blog, we’ll explore what FPO is, how it works, and why it’s an important option for companies looking to power their next growth phase.

What is a follow-on public offer (FPO)?

Follow-on Public Offer (FPO) is a type of public offering when a company that is already listed on the stock exchange makes a decision to sell more shares to the public. Essentially, it’s a manner for companies that have already raised price ranges through IPOs to raise additional capital. FPOs are best for companies with strong statistics and buyers who want to buy more shares. It is critical to observe, however, that issuing more shares can dilute the possession and profits of current shareholders, so traders must weigh the pros and cons before leaping in.

How does Follow-on Public Offer (FPO) work?

To issue additional shares to investors, this is how FPO works:

Intermediaries Appointment:

First, the company hires intermediaries such as investment banks and registrars to support the FPO. These employees help guide the company through the entire process.

Offer Document:

The company then prepares a prospectus, which is submitted to SEBI (Securities and Exchange Board of India). This document contains important information about the FPO, such as supply size, number of parts, and lot size.

Pricing:

Once SEBI approves the offer letter, the company fixes the share price for the FPO. This is the price at which investors can ask for shares.

Opening and Closing:

The FPO is open for a limited period, during which investors can submit their bids. At the end of this closing period, the FPO is closed.

Allotment and Listing:

Upon finishing the application process, shares are allocated to efficiently applied investors based on the final offer charge. Then, the stocks are indexed at the exchanges, and buying and selling begins.

Types of Follow-on Public Offer (FPOs)

When it comes to Follow-on Public Offer (FPO), there are two types; Each has it’s own impact on a company’s shareholders and understanding the difference is key for both investors and business owners.

Dilutive FPO 

Dilutive FPO occurs when a company issues additional shares to raise capital. While this helps the company raise the necessary funds, it also increases the total number of shares outstanding. As a result, the percentage owned by existing shareholders decreases, which can reduce earnings per share (EPS) and affect the value of their investments.

Non-Dilutive FPO

Non-dilutive FPO, the company is not allowed to issue additional shares. Instead, existing shareholders—such as institutional investors or company members—sell some of their shares to the public. Since no new shares are being issued, the value and ownership remains the same, which means no dilution.

Example of An Follow-on Public Offer (FPO)

One of the FPO examples in 2024 is the FPO of Vodafone Idea Limited, which took place in April. The enterprise raised a capital of ₹18,000 crore (approximately $2.2 billion) with the aid of issuing about 16.36 billion equity stocks at a charge of ₹10 to ₹11 per percentage. The most important objective behind this FPO is to sell Vodafone Idea. It turned into financially sturdy to help expand its network infrastructure. It attracted the investors and was oversubscribed by way of 6.36 times, showing how confident human beings are inside the destiny of the organisation.

Other companies like ITC and Indus Towers have also made large strides with their FPOs, raising $2.1 billion and $1.8 billion, respectively.

Difference between FPO and IPO

The Indian stock market has a few basic ways for companies to raise public funds, and the two most common ways are IPOs (initial public offerings) and FPOs (follow-on public offers).

An IPO is when a private company is going public for the first time, presenting stocks to the overall public to raise capital. This way that the owners and promoters of the organisation promote their owners’ shares, and the agency is indexed on the stock change as being publicly traded.

An FPO occurs when an existing listed company decides to issue new shares to raise more cash or reduce debt. While FPOs assist companies in increasing capital, they have the disadvantage of lowering ownership by means of existing shareholders, which can lessen their profits consistent with percentage (EPS) as extra stocks go in the marketplace.

Both IPOs and FPOs are vital tools for organisations to elevate the capital they need, but each comes with its own set of issues.

What are the benefits of FPOs?

FPOs are a powerful tool for companies looking to streamline their operations and drive future growth. Here are some of the key benefits offered by an FPO.

Capital Raising:
One of the main reasons why companies go for FPO is to raise additional capital. These funds can be used for various purposes, such as loan repayment or budget expansion.

Increased cash flow:
By issuing more shares, FPO increases the company’s liquidity. Having more shares in the market makes it easier for investors to buy and sell, which in turn can contribute to more interest from potential buyers.

Diversification:
FPOs are a great way for companies to expand their investor base. As new investors buy shares, it not only diversifies the ownership structure but also spreads the portfolio of investments, making the company more stable and less dependent on a small group of investors.

Should you subscribe for an FPO?

FPOs are generally seen as more advantageous than IPOs, as investors already have insight into the company’s management, business practices, and potential growth. Since the company is already listed, investors can view its earnings statement and banking strategies.

FPOs generally carry less risk than IPOs because the target price for the shares is usually lower than the market price, which attracts shareholders to invest. Investors then join FPOs to buy shares at a discount and then sell at a higher price to make a profit.

While some research is still needed to understand the history and performance of the company, FPOs are generally rated caseier than IPOs. This makes FPOs attractive to investors willing to be independent and risk equity in exchange for an opportunity to buy shares at a lower price.

Why does a company need an FPO?

Sometimes the company needs additional funding to fund larger projects or expand its operations. One way to raise this capital is through a Follow-On Public Offer (FPO), where the company issues more shares to the public.

In a weakened FPO, the company creates new shares and sells them to investors. This increases the total number of shares in the market, which helps the company generate capital. But now that there are more shares in circulation, the price of any existing shares may drop a bit. This is known as dilution.

While this can have an effect on the person value of the stocks within the short time period, it can bring in cash that the business enterprise desires for growth or other crucial tasks Investors have the possibility to participate inside the subsequent phase of the business enterprise , but it’s crucial to keep operating keeping in mind that they are able to price every percentage a bit.

Conclusion

An FPO is a great way for a company to raise capital after its initial public offering (IPO). Once listed, a company can no longer raise funds through an IPO, so an FPO is the next step. It allows current and new investors to purchase shares, increase ownership, and help raise the capital needed to grow the company.

While FPOs offer benefits to both the company and its investors, as well as potential growth and profitability, they also carry risks. Therefore, it is important for investors to do their research before jumping in.