What is FPO in Share Market? A Beginner’s Guide 2023

FPO or Follow-on Public Offering is one of the ways a company can raise additional capital by issuing new shares to the public after its IPO. It helps bring more liquidity to the stock and broadens the shareholder base. For investors, FPO in Share Market represents an opportunity to invest in shares of a listed company at a discount to the current market price.

Introduction to FPO in Share Market

An Initial Public Offering (IPO) marks the first time a company offers its shares to the public to raise funds. Once a company is listed, it can raise additional capital through follow-on offers on the stock exchange.

A Follow-on Public Offer (FPO) is when an already listed company issues new shares to investors and the general public. The company allot shares to institutional investors and the retail public to increase its equity capital base. This helps bring in more liquidity in the stock as the number of shares increases.

The objective of an FPO is similar to an IPO – raising capital for business operations, expansion plans, acquisitions, or other growth strategies. However, the process is faster compared to an IPO since the company is already listed. The compliance and regulatory requirements are also less stringent.

How FPO FPO in Share Market Works

Here are the key steps in an FPO process:

  • Board Approval: The company board proposes an FPO and approves the pricing and number of shares to be issued.
  • Filing of Offer Documents: The company files a draft offer document with SEBI containing details of the issue size, price band, purpose and related information.
  • Regulatory Approval: SEBI reviews the draft prospectus and clears it after any revisions. The company then files the final ‘Red Herring Prospectus’ with the RoC.
  • Marketing and Book Building: The company and merchant bankers market the FPO to institutional investors to gauge demand and discover the price. This is known as book building.
  • Pricing and Allocation: Based on the investor demand, the company sets the final FPO price and allocation of shares takes place.
  • Listing: Once the funds are received, shares are credited and get listed on the exchanges for trading. Existing shares also get listed at the new FPO price.

The time taken from filing the offer document to listing and trading is around 4-6 weeks in an FPO.

Purposes and Benefits of FPO

Companies come up with FPOs for several strategic and financial reasons:

  • Raise Additional Capital: The primary benefit of an FPO is that it allows a listed company to raise fresh capital from the public. This capital can fund business growth, expansion plans, new projects, or acquisitions.
  • Increase Liquidity: Issuing new shares in an FPO helps increase market float and liquidity in the company’s stock. Higher liquidity brings more participation by investors.
  • Dilute Promoter Holding: Promoters may choose to dilute their shareholding through an FPO. Higher public float improves corporate governance.
  • Unlock Value: Existing investors can sell a part of their pre-issue shareholding via offer-for-sale. This helps unlock value.
  • Repay Debt: Companies can utilize FPO proceeds to repay existing debt and improve the capital structure.
  • Signal Growth Prospects: An FPO serves as a signaling mechanism and reflects the management’s growth confidence.

Overall, FPOs make sense for listed firms looking to finance expansion or consolidate capital needs periodically. The cost and time for an FPO is lower than an IPO too.

FPO in Share Market

FPO vs IPO vs Rights Issue

While an FPO, IPO and Rights Issue are all meant for raising additional capital, there are some FPO in Share Market key differences:

FPO vs IPO

  • An FPO is done by a company already listed on the stock exchanges. An IPO is for unlisted companies going for the initial public listing.
  • The compliance requirement for an FPO is lower owing to the company’s listing history being available. An IPO has detailed compliance and disclosures.
  • IPOs often see higher valuations and are more expensive than FPOs given the transparency and history.
  • IPOs take longer time (3-6 months) than an FPO (4-6 weeks).

FPO vs Rights Issue

  • In a rights issue, shares are offered only to existing shareholders in proportion to their holdings. An FPO is open to all investors.
  • FPO shares are issued at a price close to or at a discount to the market price. Rights shares are at a discount to market price.
  • FPOs are underwritten by investment bankers. Rights issues may or may not be underwritten.
  • Promoter holding may get diluted in an FPO while it does not happen in a rights issue.

So in summary, FPOs are faster, and open to all investors but dilute shareholding. Rights issues avoid dilution but have a lower reach. IPOs take a longer time but fetch higher valuations.

How Companies Determine FPO Price

The FPO share price is decided based on the current market price of the existing listed shares. SEBI regulations stipulate the floor price or minimum FPO price that can be offered.

As per SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018, the floor price for an FPO shall not be less than higher of the following:

a) Average of Week High & Low Prices: Average of the weekly high and low of volume weighted average prices during 26 weeks preceding the relevant date.

b) Average of Prices: Average of the volume weighted average prices during the 2 weeks preceding the relevant date.

Where relevant date refers to 30 days prior to the FPO in Share Market filing date.

Along with the floor price, the company also announces an upper price band. The final FPO price can be set at or above the floor price and within the band in consultation with lead managers. Generally, the FPO price would be at a discount or small premium over the current market price.

Companies may also opt for the ‘book building’ method where demand from institutional investors determines the final offer price instead of a price band.

Also Read – Stock Market Tips for Beginners

How to Apply for an FPO?

When a listed company comes up with a Follow-on Public Offer, investors have an opportunity to apply and get a share allotment. Here are the key steps to apply for an FPO:

  • FPO Notification: The company’s FPO intention and price band is notified through newspaper and SEBI website ad. The prospectus with the application procedure is made public.
  • ASBA Application: Apply through ASBA mode just like the IPO application either directly or using your bank account or broker. ASBA locks funds instead of actual money transfers.
  • Escrow Account: The application money gets credited to the escrow bank account. You can make changes to or withdraw your FPO bid during the issue period.
  • Share Allotment: After closure, share allotment is done based on defined norms. Physical shares may get credited to the demat account.
  • Listing: The new FPO shares start trading on stock exchanges within 6 days of issue closure. Apply only for as many shares as you intend to hold for the long term.

So FPO in Share Market application process is quite similar to the IPO process. Retail investors should review the prospectus, valuations and growth outlook before applying.

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Risks of Investing in FPOs

While Follow-on Public (FPO in Share Market) Offers present an investing opportunity, they also come with certain risks that investors should note:

  • Issue Price Risk: FPO price may be at a high premium over market price. Correction after listing leads to loss.
  • Performance Risk: Share price post-listing may underperform the benchmark index and broader markets.
  • Market Condition Risks: Wider market corrections, subdued sentiments, or volatility around the time of FPO listing may impact stock performance.
  • Promoter Dilution Risk: FPOs where promoters significantly dilute their stake may see an adverse impact on the share price.
  • Investment Objective: Investors should assess if the FPO fits their investment goals, time frame, and risk appetite.

Thus FPO in Share Market, proper due diligence is a must before applying to any FPO. Looking at the company’s financial health, industry prospects, valuations, and risk factors holds significance.

FPOs vs IPOs – Which is Better for Investors?

For investors, both FPOs and IPOs offer an opportunity to invest in shares of a company as it offers its shares to the public. In some ways, FPOs hold an edge over IPOs:

  • Listing Gain: IPOs may have higher listing pop and gains. FPOs provide an opportunity to buy stakes in established listed companies.
  • Valuations: FPOs tend to be priced lower compared to the lofty valuations IPOs may attract in growth sectors.
  • Financial Track Record: A listed company’s financial history and performance is public through disclosures. IPOs reveal a limited history.
  • Lower Risk: Since FPO companies have past listing records, price risk may be lower than newly listed IPO stocks.

However, assessing company fundamentals, issue price and market conditions holds relevance in both FPOs and IPO investing decisions.

Conclusion

In summary, a Follow-on Public Offer or FPO in Share Market is a good way for already listed companies to raise additional capital from the public through the issuance of new shares. FPO in Share Market offers investors a chance to invest in established companies at a price linked to prevailing market rates. Investors should evaluate the prospectus, the company’s financials and valuation before applying to any FPO.

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