Follow-on Public Offer (FPO): All you need to know

This year saw a heavy rain of IPOs pouring in the stock market, with Mrs Bector's Food Specialties Limited and Antony Waste Handling Cell Limited being the most recent ones. Now, we know that companies raise capital through their Initial Public Offers (IPO). 

But what if a company wants to issue more capital after it has executed an IPO and gotten listed on a stock exchange? 

Well, it initiates a Follow-On Public Offer (FPO). Let's take a closer look.

What is a Follow-on Public Offer?

Follow-on public offering (FPO) refers to the shares issued by a listed company. These are the additional shares issued by the listed company after an initial public offering (IPO). Since FPOs follow an IPO, they are also known as secondary offerings. The companies may choose to make further offerings to raise more equity and cut down on their debts.

How is an FPO different from an IPO?

The critical difference between an IPO and an FPO is the timing. IPOs are announced when the company's shares are still unlisted and are offered to the public for the first time. In the case of FPO, the company has already listed its shares on a stock exchange and makes an additional offer of shares to the public.

Let us take a closer look at some other differences between IPO and FPO:

What are the types of FPOs?

To expand their business, companies may make an additional offer of shares to the public. This may be done to raise more money for their expansion projects or reduce the company's debts. 

This type of additional offering is known as the dilutive follow-on public offer. Another approach a company adopts is when the directors and promoters sell their privately held shares. This type of additional offering is known as the non-dilutive follow-on public offering. 

Let us try to understand these types in detail: 

Dilutive Follow-On Public Offer:

• Diluted FPO refers to when the company issues additional (new) shares and offers them to the public market.
• This type of FPO is made to fund the company's expansion strategies, raise funding, or cut down the borrowings.
• Since the number of shares increases, the earnings per share (EPS) of the company decreases.
• The inflow of cash resulting from a dilutive FPO is good for the company's long-run outlook.

Non-Dilutive Follow-On Public Offer:

• Non-dilutive FPO refers to when the existing shareholders sell-off their privately held shares to the public.
• The sale proceeds are transferred directly to the shareholders selling them.
• In most cases, the shareholders who sell their private holdings are the company's promoters, directors, or pre-IPO investors.
• No new shares are issued under non-dilutive FPO, and hence the Earnings Per Share (EPS) of the company remains unchanged. 
• This type of FPO does not benefit the company much. It is mostly used to change the shareholding/ownership pattern of the company.
• Non-diluted FPOs are also known as secondary market offerings.

What is an At-the-Market Offering (ATM)?

At-the-market (ATM) offering is another method adopted by companies to raise capital as and when needed. The company has the discretion to refrain from offering shares if it is not satisfied with the available price of the shares on a given day.

This controlling attribute is why ATM offerings are also known as controlled equity distributions.

So, what happens when a company makes an FPO?

The company sets a lower issue price than the price prevailing in the market. This is done to attract more and more subscribers. As the demand for listed shares falls, the market price also falls eventually and comes to par with the FPO price.

What is the FPO scenario in India?

The follow-on public offering has fallen out of favour as Indian companies prefer other methods of raising funds, particularly qualified institutional placements (QIPs). The shift of preference has occurred because of the ease in regulations from SEBI. FPOs demands a lot of effort from the companies to access the retail investors resulting in higher distribution costs and organizing numerous roadshows at different locations.

The FPO was a popular method for raising additional capital by companies in the early 2000s. However, the FPO popularity took a hit in 2006, when the QIP system was introduced. Eventually, the companies resorted to QIPs over the years, and there has been no FPO in India since 2015. 

The last known FPO was made by the public sector enterprise (PSE) Engineers India (EIL) in 2015. The last known private company to make an FPO was Tata Steel in 2011. ITI, another public sector enterprise (PSE), announced an FPO recently but later withdrew it, citing 'prevailing market conditions' as the reason.

Final thoughts – Should you invest in an FPO?

Investing in an FPO is not as risky as investing in IPO since you already have an idea about the company and its management. You are informed of the company's financial and stock market performance. Investors are also presented with arbitrage opportunities when they purchase shares in an FPO at a lower price and sell them later at higher prices. 

FPO is well suited for investors who cannot make time to do in-depth research on an IPO offering. Therefore, there are many plus points and few risks of investing in FPOs, provided investors to do a thorough study before investing. So, will you invest in an FPO?