Definition
A Follow On Public Offer (FPO) is a process in which a company that is already publicly listed raises additional equity capital through issuing new shares. These shares are typically sold to either current shareholders or new investors. FPO is a method companies use for diversifying their equity base, reducing debt or funding new projects.
Phonetic
The phonetic spelling of “Follow On Public Offer (FPO)” is: Follow – /ˈfɑː.loʊ/On – /ɑːn/Public – /ˈpʌb.lɪk/ Offer – /ˈɔː.fər/FPO – /ɛf piː oʊ/
Key Takeaways
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- FPO Raises Additional Capital: A Follow-On Public Offer (FPO) is a process by which existing companies listed on the stock exchange can raise additional equity capital in the markets through the issue of new shares to investors, or the sale of secondary shares to public.
- Two Types of FPOs: There are two types of FPOs – Dilutive, where the company’s Board of Directors agree to increase the share float or outstanding shares to raise more money; and Non-Dilutive, when directors or other senior level management sell their privately owned shares on the open market.
- Benefits to the Company: The major benefits to the company from an FPO include greater liquidity (from an increase in public float), increased market visibility and credibility, the opportunity to pay off existing debt, and potential for future growth through the use of raised capital.
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Importance
A Follow On Public Offer (FPO) is an important business/finance term as it gives already listed companies a way to raise additional equity capital in the markets. This can be either through the issuance of new shares or by promoters selling their existing shares, or both. This concept is essential as it offers a way for companies to raise capital for business expansion, debt repayment, and acquisitions, amongst other needs. Notably, it also allows a company’s shareholders to sell a significant part of their holdings and capitalize their investment. With FPOs, investors also get an opportunity to take part in the growth of companies post their initial public offering (IPO), making it crucial in facilitating efficient capital allocation in a market economy.
Explanation
Follow On Public Offer (FPO) serves multiple purposes in the financial and business domains. Firstly, it provides an avenue for companies that are already publicly listed to raise additional equity capital from the market. After the initial public offering (IPO), companies can use FPO to fund their expansion projects, reduce debt, or finance their working capital requirements. In this way, an FPO effectively aids in the strategic growth and corporate restructuring of organizations.Moreover, an FPO can also be used as an exit route for founders, private equity investors, or other large stakeholders who wish to offload their shares in a controlled and regulated manner. This therefore maintains investor confidence as it avoids a sudden rush of shares onto the market which could potentially result in a stock price crash. It is important to note though, that while FPOs can provide significant capital to firms and present a convenient option for existing stakeholders to sell off, they can also dilute the earnings per share (EPS) as the total number of outstanding shares in the market increases.
Examples
1. State Bank of India (SBI): In 2010, one of India’s largest commercial banks, SBI, raised around $2.2 billion through a Follow On Public Offer as a part of their capital adequacy requirement. This constituted one of the biggest FPOs in the Indian market at the time.2. Reliance Power Limited: Back in 2008, Reliance Power Limited, an Indian based energy company, raised capital through a FPO. The company announced an FPO to allot bonus shares to retail investors. This was to compensate them for the losses incurred due to the price difference between the Initial Public Offering and the listing price. 3. Yes Bank Ltd: In 2020, Yes Bank, an Indian private sector bank, raised INR 15,000 Crores (~$2 billion) through an FPO. The purpose was to ensure adequate capital to support growth and expansion, including enhancing the bank’s solvency and capital adequacy ratio.
Frequently Asked Questions(FAQ)
What is a Follow On Public Offer (FPO)?
A Follow On Public Offer (FPO) refers to the issuance of shares to investors by a public company that is already listed on the stock exchange. It is one way for a company to raise additional equity capital in the capital markets through an offering of shares to the public.
How is an FPO different from an Initial Public Offering (IPO)?
An Initial Public Offering (IPO) is the process through which a private company goes public by selling its stocks to the general public for the first time. On the other hand, an FPO is issued by a company already listed on the stock exchange, aiming to raise additional equity capital.
Why would a company choose to organize an FPO?
A company might choose to organize an FPO for various reasons, such as expansion of business operations, to pay off existing debts, or funding hefty purchases or acquisitions. In essence, a company that needs additional capital will find an FPO useful.
Who can invest in an FPO?
Both retail and institutional investors can invest in an FPO. Existing shareholders may be offered the first option to buy the new shares through a rights issue, and if they choose not to, the shares can be sold to the public.
What are the risks associated with investing in an FPO?
Like any other investment in equity, investing in an FPO also involves risks. These can include business risk, market risk, and the risk of dilution of share value if the FPO increases the total number of shares outstanding significantly.
What is the process of applying for shares in an FPO?
Investors can apply for shares in an FPO during the offer period using their online trading account or by filling out a physical form and submitting it to a bank or broker.
Can an investment in an FPO give assured returns?
No, investing in an FPO, like all stock market investments, cannot guarantee returns. The performance of the investment will depend on various factors such as the company’s profitability, market sentiment, and overall economic conditions.
How is the price of shares in an FPO decided?
The price of shares in an FPO may be decided through a book building process or might just be decided by the company itself. It could be at a premium or discount to the current market price, depending on the company’s discretion and market conditions.
Related Finance Terms
- Secondary Offering
- Underwriting
- Capital Markets
- Public Offering Price (POP)
- Equity Shares
Sources for More Information
