Follow-on Public Offers (FPOs)

Follow-on Public Offers (FPOs) serve as an important financial mechanism enabling publicly traded companies to secure extra capital from the market following their Initial Public Offering (IPO). Unlike IPOs, which mark a company’s first sale of shares to the public, FPOs provide an opportunity for companies already listed to issue new shares or allow existing shareholders to sell their stake. Understanding FPOs is essential for investors and companies alike, as they impact market dynamics, capital structure, and investment strategies. This article offers a comprehensive overview of FPOs, including their types, process, advantages, risks, and regulatory aspects.

A Follow-on Public Offer (FPO) refers to the issuance of shares to the public by a company that is already listed on a stock exchange. Essentially, it is a way for listed companies to raise fresh equity capital or for existing shareholders to dilute their holdings by selling shares to the market.

FPOs are also called secondary offerings or subsequent public offerings and come after the IPO. While the IPO introduces the company to the public market, the FPO is used to raise more funds or provide liquidity to promoters and early investors.

Take a look:

• The company’s board of directors approves the proposal to launch an FPO, deciding on the purpose, size, and pricing mechanism.

• Merchant bankers and underwriters are appointed to manage the offering, assist with pricing, marketing, and regulatory compliance.

• A detailed offer document (prospectus) is prepared, disclosing financials, business operations, risk factors, and use of proceeds.

• The offer document is filed with regulatory authorities (e.g., SEBI) for scrutiny and approval.

• Once approved, the company and merchant bankers conduct marketing activities and roadshows to attract investors.

• The share price is determined using either a fixed price or book-building method based on investor demand.

• Investors apply for shares during the offer period through brokerages or online platforms.

• Shares are allotted proportionally if the offer is oversubscribed.

• Newly issued or sold shares are listed on the stock exchange and become available for trading.

• This process enables companies to raise fresh capital or allows existing shareholders to liquidate their holdings.

FPOs can be broadly classified into two categories based on whether they dilute the existing shareholders’ equity:

Dilutive FPOs

In a dilutive FPO, the company issues fresh shares to raise new capital. This increases the total number of shares outstanding, leading to dilution of existing shareholders’ equity. The funds raised are typically used for business expansion, debt repayment, or working capital needs.

Non-Dilutive FPOs

In a non-dilutive FPO, existing shareholders such as promoters, venture capitalists, or private equity investors sell their shares to the public. This does not increase the total share capital but allows these shareholders to liquidate their holdings. No fresh capital is raised for the company in this process.

The FPO process resembles the IPO process with key regulatory and procedural steps:

Board Approval and Decision

The company’s board of directors approves the FPO proposal, including the purpose, size, and pricing mechanism.

Appointment of Merchant Bankers and Underwriters

Merchant bankers are appointed to manage the offering, assist in pricing, marketing, and regulatory compliance.

Drafting Offer Documents

A detailed offer document or prospectus is prepared, disclosing financials, business operations, risk factors, and use of proceeds.

Regulatory Filing and Approval

The offer document is filed with SEBI for scrutiny and approval.

Marketing and Roadshows

The company and merchant bankers conduct roadshows to market the FPO and attract investors.

Price Discovery

The price of the shares is decided either by fixed price or book-building method based on investor demand.

Subscription and Allotment

Investors apply for shares during the offer period. Shares are allotted proportionally in case of oversubscription.

Listing of Shares

Newly issued or sold shares are listed on the stock exchange, becoming available for trading.

Companies choose to launch an FPO for various strategic reasons:

• Raise Additional Capital: To fund expansion, R&D, acquisitions, or reduce debt.
  

• Increase Liquidity: Enhancing the free float of shares improves marketability and investor interest.
  

• Promoter Stake Reduction: In non-dilutive FPOs, promoters can partially exit or diversify holdings.
  

• Enhance Corporate Profile: Increasing public shareholding boosts transparency and credibility.

The following are the advantages and disadvantages associated with an FPO:

Advantages

• Access to shares of established companies already listed and regulated.
  

• Potential for portfolio diversification beyond IPOs.
  

• Opportunity to invest at market-related prices.
  

Disadvantages

• Possibility of dilution affecting earnings per share (EPS) and shareholding percentage.
  

• Market volatility and price uncertainty.
  

• Risk of Oversubscription and limited allotment.

FPOs are governed by stringent regulations to safeguard investor interests such as:

• SEBI’s role: Regulates disclosure norms, approval processes, pricing, and allotment mechanisms.
  

• Disclosure Requirements: Companies must reveal comprehensive financial and operational information.
  

• Listing Obligations: Companies must comply with continuous disclosure and corporate governance post-FPO.

Investors interested in FPOs can participate through the following steps:

• Eligibility: Generally open to all retail, institutional, and non-institutional investors.
  

• Application Process: Apply through brokerages or online trading platforms during the offer period.
  

• Payment: Funds are blocked or debited from investor accounts based on application.
  

• Allotment: Shares are allotted post subscription based on demand.
  

• Refunds: Unalloted applicants receive refunds of application money.

Understanding the key differences between IPOs and FPOs helps investors make informed decisions based on company stage, risk appetite, and investment goals. Here’s how an IPO and FPO differ in their feature:

This comparison clearly outlines how IPOs and FPOs differ in structure and intent, allowing you to align your investment strategy with the right opportunity.

The following are some of the examples of an FPO:

• Reliance Industries FPO (2009): Raised significant funds for expansion.
  

• Coal India FPO (2010): One of India’s largest public offers enhancing market participation.

Follow-on Public Offers serve as an important capital raising avenue for companies already listed on stock exchanges. They allow businesses to fund growth, manage debt, or provide liquidity for existing shareholders. For investors, FPOs offer opportunities to invest in established firms with a degree of market history. Understanding the types, process, and implications of FPOs enables informed investment decisions aligned with broader portfolio goals.

This content is for educational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

1. Bajaj Finserv Markets – Follow-on Public Offer
   

2. SEBI – Guidelines on Follow-on Public Offers
   

3. National Stock Exchange (NSE) – Follow-on Public Offer
   

4. Bombay Stock Exchange (BSE) – Follow-on Public Offer
   

5. Investopedia – Follow-on Public Offer
   

6. Zerodha Varsity – Follow-on Public Offer