What is a Follow-On Public Offer (FPO)?
A Follow-On Public Offer (FPO) is a method through which a listed company can raise additional capital by issuing new shares or selling existing shares to the public. Unlike an IPO, which introduces a company to the stock market for the first time, an FPO involves companies that are already publicly traded. This distinction is crucial because it means that investors have access to historical financial data and market performance of the company before deciding to invest in the FPO.
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How an FPO Works
The process of conducting an FPO involves several key steps:
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Intermediaries Appointment
Companies typically appoint investment banks and underwriters to assist with the FPO process. These intermediaries play a vital role in advising on the timing, pricing, and distribution of the new shares.
Offer Document Preparation
The next step involves preparing an offer document, which must be approved by regulatory bodies such as the Securities and Exchange Board of India (SEBI). This document contains detailed information about the company’s financial health, reasons for issuing new shares, and how the proceeds will be used.
Pricing
The price per share for an FPO is usually set at a discount to the current market price to attract investors. This pricing strategy helps ensure that the new shares are sold quickly and efficiently.
Opening and Closing
During the offer period, investors can place their bids for the new shares. Once this period closes, no further bids are accepted.
Allotment and Listing
After closing, shares are allocated to investors based on their bids. These newly issued shares are then listed on stock exchanges where they can be traded freely.
Types of FPOs
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There are several types of FPOs, each with its own characteristics:
Dilutive FPO
A dilutive FPO involves issuing new shares, which increases the total number of outstanding shares. This can dilute ownership and reduce earnings per share (EPS). Companies use proceeds from dilutive FPOs for various purposes such as funding growth projects, reducing debt, or changing their capital structure.
Non-Dilutive FPO
In a non-dilutive FPO, existing shareholders sell their shares to the public without any new shares being issued. The proceeds from this type of FPO go directly to the selling shareholders and do not affect the company’s EPS.
At-the-market FPO
An at-the-market FPO allows companies to issue new shares at the current market price directly through the secondary market. This type of FPO provides flexibility in issuing shares without going through a traditional underwriting process.
Motivations Behind Issuing FPOs
Companies issue FPOs for several strategic reasons:
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Raising Funds for Expansion: FPOs provide a quick way to raise large amounts of capital needed for expansion projects or acquisitions.
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Reducing Debt: Proceeds from an FPO can be used to pay off debts, improving the company’s financial health.
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Financing Growth Projects: Companies may issue FPOs to finance specific growth projects or initiatives that require significant funding.
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Diversifying Capital Structure: An FPO can help diversify a company’s capital structure by introducing new equity into the mix.
Compared to IPOs, FPOs are generally quicker and less expensive ways to access capital because they involve fewer regulatory hurdles since the company is already listed.
Advantages and Challenges of FPOs
Advantages
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Quick Access to Capital: FPOs allow companies to raise large amounts of capital quickly.
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Reduced Debt: By using proceeds from an FPO to pay off debts, companies can improve their financial stability.
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Funding Growth Projects: FPOs enable companies to fund growth projects without resorting to additional borrowing.
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Less Risky Than IPOs: Since the company is already listed and has a market track record, FPOs are generally considered less risky than IPOs.
Challenges
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Dilution of Ownership: Issuing new shares can dilute ownership and reduce EPS for existing shareholders.
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Careful Evaluation Needed: Investors must carefully evaluate the immediate and long-term effects of an FPO on their portfolios before making investment decisions.
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