What is FPO in Share Market and How It Differs from an IPO?

Most times, investors are exposed to many terminologies in the share market that prove to be quite confusing. FPO is one such term. In this article, we will help explain FPO's meaning, its role in the share market, how it works, and whether it's a good investment option or not. We will also talk about the difference between IPO and FPO, along with the advantages and disadvantages. So let’s get started

What is FPO?

An FPO, or follow-on public offer, takes place when a company already listed on the stock exchange issues new shares. The initial public offer (IPO) is the first sale of a company's shares to the public when they are being issued to raise capital. FPOs come after IPOs. Companies use FPOs to expand their equity base. They do so to reduce existing debt and raise additional capital. 

For example, if a company urgently requires capital to expand the business, it may raise an FPO in the share market so that new potential investors can come in. It can even issue more shares to existing shareholders. The action helps the company clean up its balance sheet by reducing debts and acquiring the funds required to undertake new projects.

How Does an FPO Work?

Now that we understand the concept of FPO. Let’s explore how FPO works once a company is already established on an exchange

1. Appointment of intermediaries: The company will first appoint experts like investment banks and underwriters to help manage the process and ensure everything goes smoothly.

2. Preparation of offer document: Based on the relative agreement and firm belief in the move, the company then prepares an offer document. These are basically all the relevant details about the FPO, including its size and price. The company then files it with the Securities and Exchange Board of India (SEBI) to approve this issuance.

3. Pricing: The company decides the price per share after SEBI clears the offer document. Thus, investors would be required to apply for the FPO at the specified price.

4. Opening and closing: After setting the price, the company makes an FPO offer for some time. In that time, you place your bids to be allotted shares. Once the time elapses, the FPO is closed.

5. Allotment and listing: After the period of application, the company will then allot the shares to investors who have made applications for those shares. Finally, these shares are listed on the stock exchange and, hence, become open for trading.

Examples of FPOs

In the history of the Indian stock market, there have been some remarkable instances of FPO in share market. Here are some of the most well-known and successful ones.

1. Vodafone Idea Ltd FPO

The Vodafone Idea FPO was a significant event in the stock market. It was aimed at raising ?18,000 crores and has been fully filed, comprising the fresh issue of 1636.36 crore shares. The bidding for the FPO opened on April 18, 2024, and closed on April 22, 2024. The allotment was made on April 23, 2024, and the shares were finally listed on the BSE and NSE on April 25, 2024. 

2. Yes Bank Ltd FPO

The new issue of shares by Yes Bank in the FPO was targeted at raising ?15,000 crores. The bidding for this issue of book-built securities was opened on July 15, 2020, and closed on July 17, 2020. By July 22, 2020, the allotment was finalized, and the shares were listed on the BSE and NSE by July 27, 2020. 

3. NMDC Limited FPO

NMDC's FPO was a mega offering, which was expected to garner close to ?9,930.45 crores. The bidding period was from March 10, 2010, to March 12, 2010. The shares of the company were listed on both BSE and NSE on March 30, 2010. 

Not All FPOs Are Successful

You also have to be aware that not every FPO turns out to be successful. Some companies fail to attract enough interest from investors, which can lead to the FPO being canceled. In other cases, share prices might drop so much after the FPO that they struggle to recover. 

For example, if a company's performance doesn't meet the expectations of investors or if market conditions are not favorable, the stock price could plummet. As a result, investors could suffer significant losses and tarnish the reputation of the company.

Types of FPOs

We can broadly classify FPOs into three types:

1. Diluted Follow-on Offering

In a diluted follow-on offering, a public company issues new shares to the public, thereby increasing the total number of shares in circulation and diluting the ownership of the existing shareholders. However, the earnings per share (EPS) decrease since more shares come to the market. Despite this, the infusion of cash generally benefits the company's long-term prospects.

2. Non-Diluted Follow-on Offering

Non-dilutive follow-on offerings are those in which the existing shareholders such as promoters or venture capitalists sell their shares to the public. Since the company is not issuing new shares, there is no dilution of the shareholdings, and the EPS remains the same. The cash from such sales goes directly to the selling shareholders. This type of offering is also known as a secondary market offering.

3. At-the-Market (ATM) Offering

In ATM offering, the company can choose when to sell shares based on their current market price. If the market price isn't favorable, the company can hold off on selling. This flexibility helps the company better control its capital-raising efforts.

Advantages of FPOs

• Capital for expansion: Companies can raise substantial funds that can be used for mergers, acquisitions, or launching new product lines.

• Debt Reduction: Companies can pay off high-interest debts using the capital raised through FPOs, thereby improving their balance sheet

• Opportunity for investors: Offers new investment opportunities for those who missed the IPO. Therefore, investors get an opportunity for capital appreciation of the FPO shares while involving lesser risk compared to the IPO.

Disadvantages of FPOs

• Dilution of shares: New shares may dilute the value of existing shares.

• Market perception: This can be perceived negatively if seen as a desperate measure for funds.

• Regulatory scrutiny: Requires compliance with stricter regulations.

IPO vs FPO

The table below simplifies the difference between IPO and FPO to make it easier for you to understand the specific characteristics of each.

Is It Good to Invest in FPOs?

Based on the company's circumstances (like good debt-to-equity ratio and revenue growth) and the share market, investing in FPOs could be a viable option. Furthermore, if the company issuing the FPO uses the funds received efficiently, it can lead to capital appreciation of shares held by the investors.

Simultaneously, it should also be noted that the reactions to FPOs are unpredictable and can also lead to a decline in share price. Furthermore, the investors can also suffer losses if the company fails to perform well after the FPO.

Conclusion

In the end, understanding FPO in share market can significantly enhance your investment strategy. Whether you're an experienced investor or just starting out, grasping the meaning of FPOs and their connection to IPOs will help you make better investment decisions.

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