Follow on public offer or FPO is a way by which companies already listed on the stock exchange issue shares to the public. It is different from an IPO which is when a company offers its shares to the public for the first time.
A Follow-On Public Offer or FPO is a secondary offering when a company that has already gone public via an IPO (and is listed on an exchange), decides to offer additional shares to the public. Companies decide to go public for many reasons, ranging from raising capital for new projects, unlocking shareholder value, and also expanding operations. FPOs are a subsequent strategy to raise more funds to lower debt and bolster financial stability, among others.
There are two ways in which a company can conduct its follow on public offer:
Dilutive FPO is when the new offer of shares actually increases the number of outstanding shares of the company.
The company board issues a new set of shares to be offered to the public. Such an FPO is undertaken by the company to fund expansion activities or pay for debts. A recent example of dilutive FPOs in the case of Indian stock markets is ITI Ltd. FPO.
Indian Telecom Industries Ltd.or ITI is a telecom manufacturing company based out of Bangalore. It is a public sector company.
ITI had put a fresh issue of 18 crore shares on offer within a price band of Rs 71 to 77 per share. This was done to increase the public shareholding and dilute the government’s stake in the company which was above 85% in January.
However later in February 2020, ITI withdrew its FPO citing prevailing market conditions.
Nondilutive, as the name suggests, does not dilute the existing shareholding. The shares issued in a non-dilutive IPO are those that are already in existence. This means that it is the directors or the bigger shareholders who sell their shares and offer them to the public.
The non-dilutive FPO does not carry any material benefits for the company. Mostly it is used to change the shareholding ownership pattern.
A company generally needs a follow-on offering to raise ‘additional capital’ for various reasons and this goal is achieved by conducting a dilutive FPO where new shares are offered and new money is generated.
In India, FPOs are governed by the SEBI (Securities and Exchange Board of India) and the process of issuing new shares for raising capital is similar to an IPO (initial public offering).
SEBI sets the guidelines for FPOs with a view towards ensuring fairness and transparency. Companies have to file their DRHP (draft red herring prospectus) with SEBI, containing all the FPO details, price band, number of shares, and the fund-raising purpose.
Once the approval is obtained, the RHP (red herring prospectus) has to be published by the company and is the final document for the FPO.
The company in question announces its FPO and sets the price range for new shares.
Investors may bid for the same thereafter via their brokers or through the Applications Supported By Banked Applications (ASBA) portal.
The company will then determine the final price depending on demand and the shares are allotted to investors likewise.
The new shares are then listed on the stock exchange and may be traded just like other counterparts.
Follow on offers do have an upper hand when compared to IPOs. You have an idea about the company, its management, business practices, efficiency, etc.
The company is not new to you. You have historical reference for its stock market performance, earnings report and a lot more data to bank on.
It does not carry as much risk as an IPO. In fact, a lot of times the price fixed for an IPO is kept lower than the market price to induce shareholders to invest in the FPO.
So many investors engage in arbitrage when they buy shares in the FPO at a discounted market price and then sell it in the market to get a premium on their transaction.
FPO is for investors who do not have the time and are not adept with complex financial knowledge to analyse IPOs.
FPOs too require you to research the company and historical performance but the degree of homework required in FPO is much easier hence it goes very well for such slightly risk-averse investors; giving them an opportunity to access shares of a company at a discounted price.
Another question that may cross your mind is why go for a follow on public offer if the shares of the company are already listed? What is the difference? The only reason why any investor would go for FPOs over listed shares is because of the price advantage.
Initial Public Offer is when unlisted companies offer shares for the first time and get listed on the stock exchanges. FPOs is something that happens when a company has already listed on the exchanges and wants to offer shares again to the public.
In IPO new shares are offered. In FP either new shares are offered or old promoter shares are put on offer again.
The IPO price is set by the company within a price band. Prices at which FPO shares are offered are a discount to the market price.
Here are a few differences between the IPO and FPO.
| Sr No. | Parameter | FPO | |
| 1. | Meaning | The first issue of shares by a company | Issuance of shares by a company to raise additional capital after IPO |
| 2. | Price | Fixed or variable price range | Price is market-driven and dependent on number of shares increasing or decreasing |
| 3. | Share capital | Increases because the company issues fresh capital to the public for listing. | Number of shares increases in dilutive FPO and remains the same in non-dilutive FPO |
| 4. | Value | Expensive | Cheaper in most cases because the value of the company is getting further diluted. |
| 5. | Risk | Riskier | Comparatively less risky |
| 6. | Status of the company | An unlisted company issues an IPO | An already listed company issues an FPO |