What is an FPO - Why Do Companies Opt for an FPO

 

What is an FPO? A Comprehensive Guide

In the world of finance, businesses often need to raise capital to fund growth, reduce debt, or pursue strategic initiatives. One of the methods companies use to achieve this is through an FPO or Follow-on Public Offering. If you’re familiar with an Initial Public Offering (IPO), an FPO can be seen as a subsequent step for already-listed companies. In this article, we’ll delve into the meaning of an FPO, how it works, its types, and the implications for both companies and investors.

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What is an FPO?

An FPO, or Follow-on Public Offering, is a process by which a publicly traded company issues additional shares to the public after its initial public offering (IPO). The primary aim of an FPO is to raise additional capital by offering new shares or selling existing shares held by promoters or early investors.

Key Characteristics of an FPO:

1. Post-IPO Mechanism: It occurs after the company has already gone public through an IPO.
2. Fundraising Tool: It helps companies raise additional funds for various purposes.
3. Market-Regulated: Just like IPOs, FPOs are regulated by market regulators (e.g., SEC in the US, SEBI in India).

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How Does an FPO Work?

The FPO process involves several steps:

1. Decision by the Company: The company’s board of directors decides to issue additional shares to meet funding requirements.
2. Regulatory Compliance: The company files a prospectus or an offering document with market regulators, detailing the offering’s purpose, size, and pricing mechanism.
3. Pricing of Shares: Shares in an FPO can be issued at a fixed price or through a book-building process, where investors bid for shares.
4. Marketing and Subscription: The company markets the FPO to investors, including institutional and retail participants, to attract subscriptions.
5. Allocation and Listing: Once the FPO is subscribed, shares are allocated to investors and subsequently listed on the stock exchange.

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Types of FPOs

There are two main types of FPOs:

1. Dilutive FPO:

In a dilutive FPO, the company issues new shares to the public, which increases the total number of outstanding shares. This type of FPO may dilute the value of existing shares but helps the company raise new capital.

Example Usage:

• Raising funds for business expansion
• Paying off existing debts
• Strengthening the balance sheet

2. Non-Dilutive FPO:

In a non-dilutive FPO, existing shareholders, such as promoters or large investors, sell their shares to the public. This does not create new shares but offers existing ones, transferring ownership without impacting the company’s capital structure.

Example Usage:

• Allowing early investors or promoters to exit
• Improving liquidity in the stock market

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Why Do Companies Opt for an FPO?

1. Raise Additional Capital

Companies use FPOs to generate funds for growth opportunities, R&D, acquisitions, or large-scale projects.

2. Reduce Debt Burden

FPO proceeds are often used to repay loans, thereby reducing financial leverage and improving creditworthiness.

3. Improve Stock Liquidity

By increasing the number of publicly traded shares, an FPO can enhance liquidity, making it easier for investors to buy and sell the stock.

4. Attract New Investors

An FPO allows companies to expand their investor base by inviting participation from retail and institutional investors.

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Advantages of FPOs

For Companies:

1. Access to Capital: FPOs provide a convenient mechanism to raise large amounts of money.
2. Strengthened Market Presence: An FPO can enhance the company’s visibility and reputation in the market.
3. Debt Reduction: Companies can use FPO proceeds to reduce high-interest debt.

For Investors:

1. Established Track Record: Unlike IPOs, FPOs involve established companies with a trading history.
2. Investment Opportunity: Investors can buy shares at competitive prices during the offering.
3. Transparent Pricing: Investors can analyze the company’s financials and past performance before investing.

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Risks and Challenges of FPOs

For Companies:

1. Stock Dilution: In a dilutive FPO, existing shareholders may see a reduction in the value of their shares.
2. Market Reception: If the market perceives the FPO negatively, it can impact the company’s stock price.
3. Regulatory Hurdles: Compliance with regulations adds time and cost to the process.

For Investors:

1. Risk of Overvaluation: There’s a possibility that the shares in an FPO may be overpriced compared to their intrinsic value.
2. Market Volatility: Stock prices can fluctuate during and after the FPO process, exposing investors to potential losses.

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Real-World Examples of FPOs

Many companies, including global giants, have utilized FPOs to achieve various objectives. For example:

• Tesla: Issued an FPO to raise funds for expanding manufacturing facilities and investing in R&D.
• HDFC Bank: Launched an FPO to increase its equity base and comply with regulatory requirements.
• Infosys: Conducted an FPO to provide liquidity to its shareholders and raise additional capital.

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FPO vs. IPO: What’s the Difference?   

Aspect	IPO	FPO
Definition	Initial offering by a private company	Additional offering by a public company
Purpose	Going public	Raising further capital
Investor Base	New investors	Existing and new investors
Risk	Higher, as the company has no market history	Lower, as the company is established

 

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Conclusion

An FPO is a powerful tool for companies seeking additional funding after their IPO. It offers advantages like capital generation, improved liquidity, and broader market reach while allowing investors to participate in an established company’s growth journey. However, both companies and investors must carefully assess the risks and market conditions before committing to an FPO. By understanding its nuances, stakeholders can make informed decisions to achieve their financial goals.