What Is an FPO, and How to Apply for One?￼
Businesses require significant capital to run their operations and clear outstanding debts. To raise funds, they often opt to go public by listing their shares to potential investors. Besides Initial Public Offerings (IPOs), several capital-raising methods include rights issuances, private placements, composite issuances, etc. All these routes have distinct working mechanisms.
This article will discuss one of the subsets of public issuances, Follow-on Public Offers (FPOs). Read on to learn about FPOs, their type, benefits, and how you can apply for FPO shares.
What Is a Follow-on Public Offer?
As the name suggests, a follow-on public offer is a share listing process that follows an IPO, where companies list additional shares to new investors to generate more funds. IPOs and FPOs are both public issue processes serving the same objective. Companies issue FPOs when they need to raise additional capital to finance expansions, projects and acquisitions.
It is very normal to get confused between an IPO and FPO. In simpler words, companies list their shares to the public for the first time through IPOs, whereas already-listed companies offer their shares to the public through FPOs.
Key Differences Between IPOs and FPOs
The following table points out the major differences between IPO and FPO to help you understand their differences clearly.
|Objective||To raise capital from the general public for the first time.||To expand the equity base and dilute shareholder’s ownership to raise additional capital|
|Performance in the open market||The market demand and the potential performance of the shares in the open market are not known.||As the companies are already listed on the stock market, sufficient historical data is available to gauge their market performance.|
|Profitability||IPOs have the potential to yield higher returns as investors get to contribute to the growth of emerging companies.||FPOs are issued for already listed companies that have already settled their market value.|
|Price||Prices are fixed or within a range decided by the company.||Prices depend on share volume and market performance.|
|Share Capital||Increases as new issues are generated.||It may increase in the case of dilutive FPO and remain unchanged in non-dilutive FPO.|
|Risks||IPOs generally involve higher risks than FPOs, as no historical data are available to gauge their market performance.||FPOs are less risky than IPO as investors can analyse a company’s market performance and invest accordingly.|
What Are the Different Types of FPOs?
An FPO can be of two types which are as follows:
- Dilutive FPO
When a company opts to issue fresh shares in the market to raise more funds, it launches a dilutive FPO. This allows companies to dilute shareholder ownership.
As a result of the issuance of new shares, this type of FPO negatively affects the issuing company’s Earnings Per Share (EPS). An EPS acts as an indicator of a company’s profitability and is calculated by dividing the net income by the total number of outstanding shares.
- Non-Dilutive FPO
Here the existing stakeholders or promoters of a company decide to sell off previously issued shares on the exchange. When shares are allocated through a non-dilutive FPO, the funds are directly transferred to the shareholders rather than the company.
Therefore, the process itself does not bring any additional capital directly to the company. However, it plays a vital role in diversifying shareholders. As the number of shares remains unchanged, the EPS value is unaffected.
Why Do Companies Issue FPOs?
Listed companies may issue FPOs to achieve the following objectives:
- Diluting Shareholdings
Company promoters or owners can diversify company shareholders by diluting their shares to the public and onboarding new investors. This rebalances the company’s capital structure allowing it to maintain its chosen debt-to-value ratio.
- Pay off Debt
Already listed companies may want to pay off their large pending debts with the funds generated through an FPO. Furthermore, it is more viable than increasing the debt liabilities by applying for loans. In this way, companies can take on more risks which, otherwise, would have been hard to take.
- Expand Business Operations
FPOs allow ventures to issue new shares and raise capital for requirements that could not be fulfilled by an IPO alone. As the companies are already listed, investors will have enough data to support a share’s market demand and value. Therefore, well-performing companies can raise significant funds through FPOs, which they can use to expand their operations.
Reasons to Consider Investing in FPOs
Now that you know the reason why companies issue FPO, let us learn why you should consider investing in FPOs:
- FPOs are comparatively more profitable than IPOs, as investors are already aware of the company’s management and business practices, unlike IPO. You, too, can refer to the historical data to analyse their stock market performance and invest in high-prospect shares via FPOs.
- Share issued through FPOs is usually cheaper than the stock’s current market prices. This allows investors to buy shares at discounted rates and sell them instantly should they choose to.
- Investors get all the prerequisites to thoroughly analyse a company’s market performance.
How to Apply for an FPO?
Applying for an FPO involves the same process as an IPO application. As a retail investor above the age of 18 with a valid PAN, you will need a Demat account, a trading account, and a bank account to participate in FPOs.
The FPO stocks will be listed in the respective stock exchange, where you will be able to place your order through the broker’s Application Supported by Blocked Amount (ASBA) service.
Eligibility Criteria for FPOs
The eligibility criteria for sellers and buyers are as follows
- For Companies coming out with FPO
- Must have a market capitalisation of ₹25 crores or more.
- Its minimum issue size shall be ₹10 crores.
- It should be a publicly listed company.
- The minimum paid-up capital of the company post-issue should be ₹3 crores.
- For Investors
Any individual above the age of 18 with a valid PAN can invest in FPO. Furthermore, the below-mentioned market participants can also take part in FPO trading.
- Mutual funds
- Retail investors
- Financial institutional investors
- Qualified Institutional Buyers (QIBs)
- Insurance companies
FPO can be an excellent investment option, as you can access all the data needed to establish a company’s market performance. Furthermore, you will have the opportunity to sell off your purchased FPO shares immediately at higher prices and earn profits from arbitrage if the opportunity arises.
However, conduct thorough research before investing in FPO to avoid losses.
Frequently Asked Question
Why is an FPO price less than the share’s market price?
Companies usually lower the FPO issue price to attract more investors. Furthermore, in the case of diluted FPOs, share prices decrease as new shareholders are onboarded.
Does share dilution reduce profits?
Yes, dilution reduces the shareholder’s equity in the short term as new shares are issued to new potential investors. This reduces the Earning Per Share, which negatively affects the share prices. However, there are factors involved like expansion of business which may negate the impact on per share earnings.
Does non-diluted FPO affect share price?
Factors that affect EPS are the net income and the outstanding shares. However, no new shares are issued in the case of a non-diluted FPO. As a result, theoretically the share price remains unaltered. But the share price may change due to other market factors.