What is FPO in Share Market
What is FPO in Share Market
Every business endeavor requires sufficient funds to effectively execute ideas and achieve predetermined financial goals.
Whether it’s developing a new product, expanding operations, or enhancing profitability, capital plays a vital role.
However, companies often prefer to avoid excessive debt, as it can have a negative impact on their balance sheets.
In such situations, companies seek alternative methods to raise funds without borrowing, and one such approach is through an Initial Public Offering (IPO).
An IPO enables a company to list its shares on the stock exchange and offer them to the public for the first time.
But what happens when a company needs to raise additional capital after a few years of conducting an IPO? This is where they can utilize a capital-raising process known as a Follow-on Public Offering (FPO).
An FPO allows the company to issue and sell additional shares to the public, further increasing its capital base.
FPO in Simple Terms
A Follow-on Public Offering (FPO), also known as a Follow-up public offering, is a process wherein a company issues new shares to investors after it has already been listed on the stock exchange through an Initial Public Offering (IPO).
The FPO serves as a direct continuation of the IPO and enables companies to raise fresh capital subsequent to their initial fundraising.
The primary purpose of an FPO is to raise additional capital and potentially reduce existing debt obligations. The process of conducting an FPO is similar to that of an IPO, although FPOs are typically more cost-effective in comparison.
By conducting an FPO, companies can tap into the public market once again to attract new investors and secure additional funding for various purposes such as expansion, acquisitions, debt repayment, or other strategic initiatives.
Different Types of FPO
FPOs are classified into three different types, distinguishing them from IPOs which may have either a Fixed-price offering or a Book Building Offering.
Diluted FPO:
In this process, the company offers additional fresh shares to the public with the aim of raising capital.
This results in an increase in the total outstanding shares of the company, leading to a decrease in the Earnings Per Share (EPS). Additionally, a diluted FPO has the effect of reducing the company’s share price, as new investors become shareholders.
However, the overall value of the company remains unchanged. The funds raised through a diluted FPO are typically utilized to alter the company’s capital structure or decrease its outstanding debt.
Non-Diluted FPO:
A non-diluted FPO is when the company’s largest shareholders, such as the founders or board of directors, offer the shares they hold privately to the general public.
The process of non-diluted FPO does not increase the number of outstanding shares that are available to the company, but it does increase those available to the public.
Unlike a diluted IPO, this method does not increase or decrease the company’s number of shares. Since the number of shares remains unchanged, there is no effect on the company Earnings Per Share (EPS).
Under non-diluted FPO, the cash proceeds from the public go directly to the largest shareholders who have offered their shares.
At-the-Market FPO:
In an At-the-Market (ATM) FPO, companies have the flexibility to raise funds based on the current market price of their shares.
If the share price of the company issuing the FPO declines, they have the option to withdraw the offering of shares to the public.
This type of FPO is also known as controlled equity distributions, as it allows shares to be offered in the secondary market at the prevailing market price of the company’s shares.
FPO Vs IPO
In the Indian stock market, companies have various methods to raise funds from the public, and two commonly used approaches are IPOs and FPOs. An IPO, or Initial Public Offering, enables private companies to generate capital by issuing shares to the general public for the first time.
During an IPO, the company’s owners and promoters reduce their ownership stake by offering shares to the public, and subsequently, the company gets listed on the stock exchanges as a publicly traded entity.
Conversely, an FPO, or Follow-on Public Offer, is a financial process used by companies that are already listed on the stock exchanges to offer additional shares to the general public, aiming to diversify their equity base.
Companies opt for an FPO to raise additional capital or decrease their debt. With an FPO, the company’s Earnings Per Share decreases as more shares enter the stock market.
Final Words
An FPO (Follow on Public Offer) serves as an attractive option for companies seeking to raise additional capital from the general public, especially when they require more funds after conducting an IPO (Initial Public Offering).
Once a company has already listed its shares through an IPO, the FPO becomes the primary method for raising further capital.
In an FPO, both current and new investors have the opportunity to invest in the company and increase their ownership.
FPOs offer numerous benefits for both the issuing company and investors. For the company, it provides a means to raise funds for various purposes, such as funding expansion plans, financing research and development, making acquisitions, reducing debt, or enhancing working capital.
This additional capital infusion can fuel the company’s growth and help it achieve its strategic objectives.
At the same time, FPOs offer investors the potential to profit from the company’s success as it utilizes the raised funds to enhance its business operations, increase market share, and generate higher profits.
However, it’s crucial to recognize that participating in an FPO involves certain risks that investors should carefully consider.
Factors such as market conditions, the company’s financial health, industry trends, and the potential dilution of ownership due to the issuance of new shares can all impact the success of an FPO.
Therefore, before deciding to participate in an FPO, investors are advised to conduct thorough research and analysis.
They should evaluate the company’s financial performance, growth prospects, competitive positioning, and any other relevant factors to make an informed investment decision.
By conducting due diligence and staying informed, investors can assess the potential risks and rewards associated with an FPO and determine whether it aligns with their investment goals and risk tolerance.
