What is FPO in Share Market

A Follow-on Public Offer (FPO) is a process where a company already listed on the stock exchange offers additional shares to investors. It's is aimed at raising more capital to fund expansion, reduce debt, or achieve other strategic goals. Unlike an Initial Public Offering (IPO), which is the first time a company goes public,

What is FPO (Follow on Public Offering)?

A follow-on Public offer (FPO) occurs when a company already listed on a stock exchange issues additional shares to investors after its initial public offering (IPO). Companies typically announce FPOs to raise equity or reduce debt.

Example

One notable example of a Follow-on Public Offering (FPO) is Ruchi Soya Industries Limited, a leading Indian company in the edible oil and soya products sector. Ruchi Soya launched its FPO on March 22, 2022, as part of its broader strategy to raise capital for its business operations and reduce its debt burden. This FPO was a significant event in the Indian stock market, attracting substantial attention from both retail and institutional investors.

The offering was priced in a range of ₹615 to ₹650 per share, with the company offering approximately 6.6 crore shares to the public. The FPO was oversubscribed, reflecting strong investor confidence in the company's prospects, particularly under the ownership of the Patanjali Ayurved Group, which acquired Ruchi Soya in 2019 through an insolvency process.

On April 8, 2022, the shares were successfully listed on the stock exchange, marking a crucial milestone for Ruchi Soya. Through this FPO, the company managed to raise an aggregate amount of ₹4,300 crore. The capital raised was primarily earmarked for repaying existing debt, funding working capital requirements, and general corporate purposes, thereby strengthening the company's financial position and paving the way for future growth initiatives.

The success of Ruchi Soya's FPO not only underscored the company's robust market presence but also highlighted the importance of strategic capital raising through public offerings in India's dynamic corporate landscape. This FPO served as a critical step in the company's journey toward achieving its long-term business objectives while providing an opportunity for investors to participate in its growth story.

How Does FPO Work?

A Follow-on Public Offer (FPO) is a process where a company that is already publicly traded issues additional shares to raise more capital. This is done after the company’s initial public offering (IPO). Companies typically use FPOs to fund new projects, pay off debt, or expand their operations. Essentially, it allows the company to raise more money from the public by offering more shares for sale.

What are the Types of FPO?

FPO, or Farming Producers Organisations, can take various forms, each serving specific purposes and goals. Here are the main types of FPOs:

1. Dilutive FPO

In a dilutive Follow-up Public offering (FPO), a company issues new shares to the public, increasing the total number of shares outstanding. This can dilute the value of existing shares. The primary goal is to raise additional capital for purposes such as expansion, debt repayment, or other corporate needs. However, the increase in shares can lead to a decrease in the company’s earnings per share (EPS).

Example

Let's consider a technology company, Tech Innovations Inc., that has 1 million shares outstanding and is currently trading at ₹50 per share, giving it a market capitalisation of ₹50 million. To fund a new project, the company decides to issue an additional 200,000 shares through a dilutive Follow-on Public Offering (FPO) at ₹40 per share.

After the offering, the total shares outstanding increase to 1.2 million. Assuming the company remains valued at ₹50 million, the new share price would be approximately ₹41.67 (₹50 million / 1.2 million shares), which is lower than the original share price. Existing shareholders now own a smaller percentage of the company, leading to potential dilution of their voting power and earnings per share.

2. Non-Dilutive FPO

A non-dilutive FPO involves selling existing shares, typically held by current shareholders like promoters, directors, or private equity investors. When these shares are sold to the public, the total number of shares outstanding remains unchanged, so the EPS is unaffected. The proceeds from the sale go directly to the selling shareholders, not the company.

Example

Let's consider XYZ Pharmaceuticals, which has 2 million shares outstanding and decides to conduct a non-dilutive Follow-on Public Offering (FPO) by selling the 500,000 shares it holds in treasury.

These shares are sold at the current market price of ₹30 per share, raising ₹15 million for the company. Since no new shares are issued, the total number of outstanding shares remains the same at 2 million, and existing shareholders do not experience dilution of their ownership or earnings per share.

3. At-the-Market (ATM) Offering

An At-the-Market (ATM) Offering allows a company to sell its shares incrementally over time at prevailing market prices. This method provides flexibility to raise capital as needed without issuing a large number of shares all at once.

The company can choose to sell shares when market conditions are favourable and can stop the offering at any time. Funds raised are often used for general corporate purposes, such as working capital, research and development, or debt repayment.

Example

ABC Corp., a retail company, has been experiencing favourable market conditions and wants to raise capital to fund expansion. It establishes an At-The-Market (ATM) program, allowing it to sell up to ₹10 million worth of its shares over time. The company starts selling shares at market prices, averaging ₹25 per share.

Over three months, ABC Corp. sold 400,000 shares through the ATM program, raising ₹10 million without significantly impacting the share price since the sales are spread out over time. This approach allows ABC Corp. to take advantage of favourable market conditions while minimising dilution.

How do Companies Issue FPO?

Companies issue Follow-on Public Offers (FPOs) to raise additional capital from the public after their initial public offering (IPO). Here's a detailed breakdown of the process:

1. Need Assessment

The company evaluates its financial requirements, identifying the need for additional capital. This could be for new projects, expansion, debt repayment, or increasing working capital to support business operations and growth.

2. Regulatory Approval

The company must secure approval from regulatory bodies like SEBI in India. This involves submitting detailed documentation, including financial statements, business plans, and compliance with legal requirements to ensure transparency and investor protection.

3. Price Band

In collaboration with underwriters, the company sets a price band for the FPO. This range allows investors to bid for shares within a specified limit, balancing market demand and the company’s valuation expectations.

4. Offer Period

The FPO is open for a designated period, typically a few days to a week. During this time, investors can submit their applications to purchase shares, providing an opportunity for a broad range of investors to participate.

5. Allotment

After the offer period closes, shares are allocated to investors based on their bids. The allotment process ensures fair distribution, often prioritising retail investors, institutional buyers, and other categories as per regulatory guidelines.

6. Listing

The newly issued shares are listed on the stock exchange, making them available for trading. This step enhances liquidity and allows investors to buy and sell the shares in the open market, contributing to the company’s market capitalisation.

7. Utilisation of Funds

The company deploys the funds raised from the FPO according to the objectives outlined in the need assessment. This could include project financing, debt reduction, or other strategic initiatives to enhance business operations and growth.

8. Performance Monitoring

The company continuously monitors the impact of the raised funds on its financial health and operations. This involves tracking key performance indicators, ensuring the funds are used effectively, and providing regular updates to stakeholders.

Why do Companies Issue FPO?

Companies issue Follow-on Public Offerings (FPOs) for several reasons. Some of the popular reasons include:

1. Raising Capital for Expansion

Companies often need substantial funds to expand their operations, enter new markets, or invest in research and development (R&D). Expansion can include opening new branches, increasing production capacity, or launching new products. By issuing an FPO, companies can raise the necessary capital without incurring debt.

This approach allows them to avoid interest payments and maintain a healthier balance sheet. Additionally, the raised capital can be used to enhance technological capabilities, improve infrastructure, and hire skilled personnel, all of which contribute to long-term growth.

2. Reducing Debt

High levels of debt can be a burden for companies, leading to significant interest expenses and financial instability. By issuing an FPO, companies can use the proceeds to pay off existing debts. This reduction in debt can improve the company’s financial health by lowering interest expenses and enhancing credit ratings.

A stronger balance sheet can also make it easier for the company to secure future financing on favourable terms. Moreover, reducing debt can free up cash flow, allowing the company to reinvest in its core operations and pursue growth opportunities.

3. Improving Liquidity

Liquidity refers to the ease with which shares can be bought and sold in the market. An FPO increases the number of shares available for trading, which can enhance liquidity. Improved liquidity can attract more investors, including institutional investors who prefer stocks with higher trading volumes.

Increased investor interest can lead to a higher market valuation for the company. Additionally, better liquidity can reduce price volatility, making the stock more attractive to long-term investors. Overall, improved liquidity can create a more stable and appealing investment environment.

4. Facilitating Acquisitions

Acquisitions are a strategic way for companies to grow quickly and gain a competitive edge. By issuing an FPO, companies can raise funds specifically to acquire other businesses. These acquisitions can help companies enter new markets, diversify their product offerings, and achieve economies of scale.

Additionally, acquisitions can provide access to new technologies, intellectual property, and skilled personnel. By leveraging the funds raised through an FPO, companies can execute their acquisition strategies without depleting their existing cash reserves or taking on additional debt.

What are the Benefits of FPO?

Follow-on Public Offerings (FPOs) are additional issuances of shares by a publicly traded company after its initial public offering (IPO). Here are the key benefits of FPOs:

Why are the Factors That Impact the FPO?

Factors impacting a Follow on Public Offer (FPO) are crucial for both the issuing company and potential investors. Below are five key factors:

1. Market Conditions

The stock market's overall state can significantly influence an FPO's success. In a bullish market, investors are generally more optimistic and willing to invest, leading to higher demand for new shares. Conversely, investors may be more cautious in a bearish market, resulting in lower demand and potentially less favourable pricing for the issuing company.

2. Company Performance

The financial health and performance of the issuing company play a vital role in attracting investors. Companies with strong earnings, consistent growth, and a solid track record are more likely to instil confidence in potential investors. Positive financial metrics and future growth prospects can make the FPO more appealing.

3. Pricing Strategy

The price at which the new shares are offered is critical to the success of the FPO. If the shares are priced too high, they may not attract enough investors, leading to undersubscription. On the other hand, if the shares are priced too low, the company might not raise the desired capital and could be perceived as undervaluing itself. Striking the right balance is essential to ensure adequate demand and fair valuation.

4. Investor Sentiment

The general mood and perception of investors towards the company and its industry can impact the FPO. Positive sentiment, driven by favourable news, industry trends, or strong company performance, can lead to higher demand for shares. Conversely, negative sentiment, possibly due to industry downturns or adverse news, can deter investors and affect the FPO’s success.

5. Regulatory Environment

Changes in regulations and compliance requirements can affect the timing and success of an FPO. Favourable regulations, such as tax incentives or streamlined approval processes, can facilitate a smoother and more attractive offering. However, stringent rules, increased compliance costs, or regulatory uncertainties can pose challenges and potentially delay or hinder the FPO process.

Why is FPO Important for Investors?

A Follow on Public Offer (FPO) is important for investors as it provides an opportunity to invest in a company they believe in and potentially benefit from its growth. Below are five key reasons why FPOs are significant for investors:

1. Investment Opportunity

FPOs allow investors to purchase additional shares of a company they already trust or are interested in. This can be a chance to increase their stake in a promising company.

2. Price Advantage

Shares in an FPO are often offered at a discount to the current market price. This can provide investors with an opportunity to buy shares at a lower cost, potentially leading to higher returns if the company’s stock price increases.

3. Liquidity

FPOs can enhance the liquidity of a company’s shares by increasing the number of shares available in the market. This can make it easier for investors to buy and sell shares, improving market efficiency.

4. Company Growth

The funds raised through an FPO are typically used for expansion, debt reduction, or other growth initiatives. By participating in an FPO, investors can support the company’s growth plans and potentially benefit from its future success.

5. Market Confidence

A successful FPO can signal strong market confidence in the company. This can attract more investors and positively impact the company’s stock price, benefiting existing and new shareholders.

Why You Should Invest in FPO?

Investing in a Follow-on Public Offer (FPO) can be a strategic move for investors aiming to benefit from a company’s growth and stability. Below are four key reasons to consider investing in FPOs:

1. Established Track Record

Unlike Initial Public Offerings (IPOs), FPOs are issued by companies that are already publicly traded. This allows investors to evaluate the company’s performance, financial health, and market position before making an investment decision.

2. Lower Risk

Since the company is already listed and has a trading history, the risk associated with investing in an FPO is generally lower compared to an IPO. Investors have access to more information and can make informed decisions based on the company’s past performance.

3. Attractive Pricing

Shares issued through FPOs are often priced lower than the current market price, providing an opportunity for investors to buy shares at a discount. This can lead to potential gains if the company’s stock price increases in the future.

4. Capital for Growth

Companies typically use the funds raised through FPOs to finance expansion plans, reduce debt, or fund acquisitions. This infusion of capital can strengthen the company’s financial position and drive future growth, benefiting shareholders in the long run.

Risk of FPOs

While Follow-on Public Offerings (FPOs) offer several benefits to companies, they also come with risks, both for the issuing company and investors:

1. Dilution of Shareholder Equity

Issuing new shares can dilute the ownership percentage of existing shareholders, potentially reducing earnings per share (EPS) and the stock’s market value.

2. Pricing Challenges

If the FPO is priced too high compared to the current market price, it may not attract enough investors, leading to potential losses for those who do invest.

3. Market Volatility

Market conditions can significantly impact the success of an FPO. High volatility can deter investors, making it challenging for the company to raise the desired capital.

4. Regulatory Hurdles

Companies must navigate various regulatory requirements and compliance issues when conducting an FPO. Failure to meet these requirements can result in legal complications and financial penalties.

The Key Takeaway

A Follow on Public offer (FPO) is a strategic way for companies to raise additional capital while offering investors another opportunity to purchase shares. Whether investing in an FPO or exploring the company's growth prospects, understanding its objectives and impact is essential. Investors should carefully assess the company's financial health and market conditions before participating in an FPO to make informed decisions that align with their investment goals.

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FAQs

What is The Difference Between FPO and IPO?

An Initial Public Offering (IPO) is the first sale of a company’s shares to the public. A Follow-on Public Offer (FPO) is an additional issuance of shares by a company that is already publicly traded this is the main difference between an FPO vs IPO

Is it Good to Invest in FPO?

Investing in an FPO can be beneficial as it allows investors to buy shares of a company they are already familiar with, potentially reducing investment risk compared to an IPO.

What is An Example of An FPO?

Companies like Tata Steel Limited and Power Finance Corporation have issued FPOs to raise additional capital.

Who is Eligible For FPO?

Any publicly listed company with a market capitalisation of ₹25 crores or more and a minimum issue size of ₹ 10 crores can issue an FPO.

What is a Follow on Public offer?

An FPO is when a company that is already listed on an exchange issues new shares to investors to raise additional capital or reduce debt.

Is FPO Tax-Free?

There is a tax benefit on FPOs, but it is not tax-free. In the union budget for 2018-19, the government has a tax benefit that includes a five-year tax exemption.

Who Can Buy An FPO?

Anyone who has a demat account can invest in an FPO. This includes new investors or existing shareholders who want to increase their ownership.