Investing in the stock market can be both exciting and overwhelming, especially when terms like IPO, FPO, and OFS start popping up. While most of us are familiar with IPOs (Initial Public Offerings), not many understand what an FPO is or how it works.
In this blog post, we’ll break down the concept of a Follow-on Public Offer (FPO) in simple terms, explain how it works, and provide an example to help you relate better.
What is it?
A Follow-on Public Offer (FPO) is a process through which a company that is already listed on the stock market issues additional shares to the public. Unlike an IPO, which is the first sale of shares by a company to the public, an FPO happens after the company is already publicly traded. Companies usually opt for an FPO to raise additional capital for various purposes, such as expanding operations, reducing debt, or funding new projects.
Why Do Companies Launch an FPO?
Companies launch FPOs for several reasons:
To Raise Capital: The primary reason is to raise additional funds for business growth, such as setting up new facilities, acquiring another company, or investing in research and development.
To Reduce Debt: Some companies use the proceeds from an FPO to pay off existing debts, which can improve their financial health.
To Meet Regulatory Requirements: In some cases, companies may need to increase their public shareholding to comply with regulatory norms.
Types of FPOs
There are two main types of FPOs:
Dilutive FPO: In this type, the company issues new shares, which increases the total number of shares in the market. This can dilute the ownership percentage of existing shareholders.
Non-Dilutive FPO: Here, existing shareholders (like promoters or large investors) sell their shares to the public. The total number of shares remains the same, so there’s no dilution of ownership.
How Does an FPO Work?
The company files a proposal with the Securities and Exchange Board of India (SEBI) for approval.
Once approved, the company announces the FPO, specifying the number of shares, price range, and timeline.
Investors can apply for the FPO through their brokerage accounts or online platforms.
After the FPO closes, the shares are allotted to investors, and they are listed on the stock exchange for trading.
Advantages of Investing in an FPO
Opportunity to Invest in Established Companies: Unlike IPOs, FPOs are issued by companies that are already listed, so you have access to their financial history and performance.
Potential for Discounts: Companies sometimes offer FPO shares at a discount to the current market price to attract investors.
Diversification: Adding FPO shares to your portfolio can help diversify your investments.
Risks to Consider
Market Volatility: The stock price may fluctuate after the FPO, depending on market conditions and investor sentiment.
Dilution of Shares: In a dilutive FPO, the increase in shares can reduce the value of existing shares.
Company Performance: If the company doesn’t use the raised funds effectively, it may not deliver the expected returns.
Example
A more recent example of an FPO in India is the Yes Bank FPO in 2020. Yes Bank, a private sector bank, launched an FPO to raise ₹15,000 crore to strengthen its capital base after facing financial difficulties. The FPO was a critical step in the bank’s revival plan, which included efforts to improve its balance sheet and regain investor confidence.
The FPO was priced at ₹12–13 per share, a significant discount to the market price at the time. Despite the challenges the bank had faced, the FPO was oversubscribed, reflecting investor confidence in the bank’s turnaround strategy. This example highlights how FPOs can play a crucial role in helping companies recover and grow, while also offering investors an opportunity to participate in their revival journey.
Summary
A Follow-on Public Offer (FPO) is a valuable tool for companies to raise additional capital after they are already listed on the stock market. For investors, FPOs present an opportunity to invest in established companies, often at discounted prices. However, like any investment, it’s essential to research the company’s financial health, the purpose of the FPO, and market conditions before making a decision.
Whether you’re a seasoned investor or just starting your journey, understanding FPOs can help you make informed decisions and grow your portfolio.
Reference Links
Delisting of Shares | Demerger of Companies | Short Selling of Stocks
Reference Book: "The Autobiography of a Stock"
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