What is FPO? How Follow-on Offering Differs from IPO
An FPO, or Follow-on Public Offer, is when a company that is already listed on a stock exchange issues new shares to the public again. Unlike an IPO which is a company's first entry into public markets, an FPO is a subsequent fundraise by a company that already has shareholders and a trading history.
YES Bank's FPO in 2020 is a well-known Indian example. After the bank went through a severe crisis and was rescued with the intervention of the Reserve Bank of India, it needed fresh capital to rebuild its balance sheet. Since it was already listed, it could not do an IPO again. Instead, it did an FPO, offering new shares at Rs.12 per share to raise money from existing and new investors.
Why does a listed company do an FPO?
The most common reason is to raise additional capital for expansion, debt repayment, or strengthening the balance sheet. An FPO allows a company to access public markets again without going through the full IPO process from scratch.
It is worth noting that an FPO typically dilutes existing shareholders. When new shares are issued, the total share count goes up. Each existing shareholder now owns a smaller percentage of the company unless they participate in the FPO. This dilution effect is one reason some investors view FPOs cautiously.
What is the difference between an IPO and an FPO?
| Feature | IPO | FPO |
|---|---|---|
| Company Status | Private, listing for first time | Already listed on exchange |
| Share History | No trading history available | Price history exists for analysis |
| Investor Risk | Higher, limited info | Lower, public data available |
| Dilution | First-time shareholder dilution | Dilutes existing shareholders |
| Pricing | Price band set by company and bankers | Priced relative to current market price |
| Purpose | First capital raise from public | Additional capital raise |
What are the types of FPO?
- Dilutive FPO. The company issues brand new shares, increasing total share count and raising fresh capital. Existing shareholders get diluted as their ownership percentage falls.
- Non-dilutive FPO. Existing shareholders, typically promoters or large investors, sell their shares to the public. No new shares are created. The company receives no money. This is effectively an OFS conducted as part of a public offer.
How do I apply for an FPO?
The application process is the same as an IPO. You apply through ASBA via your broker or bank during the FPO subscription window. The key difference is that you can also look at the company's existing market price, track record, and financial history, which you cannot do with a brand new IPO.
Investments in securities market are subject to market risks. Read all offer documents before investing. This article is for educational purposes only.
Frequently Asked Questions
If a company needs to raise capital, why does it choose FPO over a Rights Issue?
Companies that want to give priority to existing shareholders typically choose a Rights Issue first, because it allows current shareholders to buy new shares at a discount in proportion to their existing holding. An FPO, on the other hand, opens the issue to the general public. Companies prefer FPO when they want to bring in new investors, broaden their shareholder base, or when the capital requirement is large enough that existing shareholders alone may not cover it. In practice, a Rights Issue is often the first choice for raising capital from existing shareholders, and an FPO comes when broader participation is needed.
Is the FPO price always lower than the current market price?
Often, but not always. Many FPOs are priced at a slight discount to the current market price to attract investors. However, some FPOs are priced at or near the market price. The pricing depends on market conditions, company financials, and how urgently the company needs capital. A steep discount can signal financial stress, while a near-market price suggests the company is in a stronger position.
How does an FPO affect the share price of a company?
FPOs often put short-term downward pressure on the share price for two reasons. First, the announcement of new share issuance increases future supply. Second, if priced at a discount, investors may sell existing shares to buy cheaper FPO shares. Long-term impact depends on whether the capital raised is deployed productively and improves the company's earnings.
Can a foreign investor participate in an Indian FPO?
Yes, foreign investors can participate subject to SEBI and RBI regulations. Foreign Portfolio Investors have a dedicated category in most FPOs. Non-Resident Indians can apply in the NRI category. The exact limits and conditions are specified in the FPO prospectus.
What happens if an FPO is undersubscribed?
If an FPO does not receive applications for the minimum required subscription, which is typically 90% of the issue size, the company cannot proceed with the allotment and must return all application money. This is rare for large established companies but has happened with smaller or financially troubled ones. An undersubscribed FPO is generally seen as a negative signal about investor confidence in the company.
Investments in securities market are subject to market risks. This article is for educational purposes only and does not constitute investment advice.
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