In the dynamic world of the Stock Market, companies are constantly looking for ways to raise funds for strategic investments, debt reduction, or expansion. Initial Public Offerings (IPOs) are well-known for introducing companies to the stock market, but Follow-on Public Offers (FPOs) are another important way to raise additional capital from the public post-IPO. Namo Trading Academy explores a comprehensive guide that delves into the concept of FPO, exploring their types, benefits, risks, regulatory framework, and impact on investors and the issuing companies.
What is a Follow-on Public Offer (FPO)?
A Follow-on Public Offering (FPO), also known as a secondary offering, is the method by which a publicly traded company issues additional shares to investors after its Initial Public Offering (IPO). FPOs can be used to raise equity capital from the market for various corporate purposes, including expansion projects, debt reduction, or meeting working capital requirements. The FPO serves as a means for companies to capitalize on their market presence and investor confidence.
Types of Follow-on Public Offers
Dilutive FPO: In a dilutive FPO, the company issues new shares, thereby increasing the total number of shares outstanding. This dilutes the ownership percentage of existing shareholders but raises new capital for the company.
Non-Dilutive FPO: In this type, existing shareholders, such as promoters or large investors, sell their shares to the public. Since no new shares are issued, there is no dilution of existing ownership. However, the process goes to the selling shareholders, not the company.
Key Differences Between IPO and FPO
| Feature | IPO | FPO |
|---|---|---|
| Definition | First-time issuance of shares | Subsequent issuance of shares |
| Purpose | To raise capital and go public | To raise additional capital |
| Investor Perception | Riskier due to lack of history | Less risky due to track record |
| Pricing Method | Fixed/Book Building | Market-driven or Book Building |
| Regulatory Requirements | Extensive due diligence | Fewer disclosures if already listed |
Why Do Companies Opt for an FPO?
- Funding Expansion: Companies may require capital for new projects, acquisitions, or geographical expansion.
- Debt Reduction: An FPO can provide liquidity to pay down existing loans, improving financial health.
- Improving Liquidity: Issuing more shares increases stock float, enhancing market liquidity.
- Attracting Institutional Investors: A successful FPO often attracts large institutional investors, bolstering market confidence.
Advantages of FPOs
- Established Track Record: Unlike IPOs, companies issuing an FPO have a public financial history, making it easier for investors to make informed decisions.
- Lower Risk for Investors: Investors can evaluate past performance and market behaviour before investing.
- Faster Capital Raising: Since regulatory requirements are less stringent than IPOs, the process is faster.
Risks and Challenges of FPOs
- Dilution of Ownership: New shares can dilute the ownership and voting power of existing shareholders.
- Market Perception: Frequent FPOs may be seen as a signal of financial instability or over-reliance on equity financing.
- Stock Price Volatility: An FPO announcement may lead to short-term fluctuations in the stock price.
Regulatory Framework in India
In India, FPOs are regulated by the Securities and Exchange Board of India (SEBI). The key regulations include:
- SEBI (Issue of Capital and Disclosure Requirements) Regulations: These specify eligibility criteria, disclosure norms, and procedural requirements for FPOs.
- Eligibility Criteria: The company must be listed and compliant with listing regulations.
- Disclosure Requirements: The prospectus must contain updated financials, risk factors, and usage of proceeds.
- Pricing Mechanism: Pricing can be fixed or based on book-building. Book-building involves price discovery through investor bids.
Process of an FPO
- Board Approval: The company’s board approves the decision to raise funds via FPO.
- Appointing Intermediaries: Investment bankers, legal advisors, and auditors are appointed.
- Drafting Prospectus: A draft red herring prospectus is filed with SEBI.
- SEBI Review: SEBI reviews and may provide observations or request clarifications.
- Marketing (Roadshows): The company and bankers promote the offering to potential investors.
- Price Discovery: If book-built, investor bids determine the final price.
- Opening and Closing of Issue: The issue opens for a few days during which investors can apply.
- Allotment and Listing: Shares are allotted and credited to investors’ accounts. New shares are listed on stock exchanges.
FPO vs. Rights Issue
While both are tools for raising capital, they differ fundamentally:
- Rights Issue: Offered only to existing shareholders, often at a discount.
- FPO: Open to all investors, including new ones.
Case Studies of Notable FPOs in India
- Coal India Limited (2015): One of the largest FPOs in India, raising over INR 22,500 crore.
- NTPC Limited (2013): Raised funds for capacity expansion and infrastructure.
- REC Limited (2010): Used proceeds for lending operations and capital adequacy.
Impact of FPOs on Stock Prices
- Short-Term: The stock may decline due to dilution concerns or if the issue price is lower than the market price.
- Long-Term: If funds are utilized effectively, FPOs can enhance profitability and shareholder value.
Investor Considerations Before Investing in an FPO
- Company Fundamentals: Review financial statements, growth prospects, and past performance
- Use of Proceeds: Understand how the raised funds will be deployed.
- Pricing and Valuation: Compare the FPO price with the market price and the essential value.
- Management Credibility: Evaluate the track record of the promoters and executives.
- Market Conditions: Overall market sentiment can influence the success of the FPO.
Outlook of FPOs in India
With growing investor participation and deepening capital markets, FPOs are likely to gain additional traction. Companies with proven performance may also issue FPOs over debt tools to maintain financial flexibility. Moreover, policy initiatives aimed at improving market transparency and ease of doing business are expected to promote the FPO environment.
Conclusion
Follow-on Public Offers (FPOs) serve as an essential funding tool for companies looking to scale operations or strengthen their balance sheets. For traders, they provide an opportunity to invest in established companies with recognized financial histories. However, as with any investment, due diligence and a thorough understanding of the offering are essential. Enroll in Namo Trading Academy for more Stock Market Updates. Whether you’re a trader looking for new opportunities or a corporation planning capital expansion, understanding FPOs is a crucial aspect of navigating the stock market with confidence.
