Are terms like FPO and IPO frequently popping up in your news feed? If you’re new to investing, understanding these concepts is essential to know the nuances of stock investment. This blog will break down what an FPO is, its types and how it differs from an IPO. By the end, you’ll have a clear idea of whether an FPO or IPO suits your investment goals better.
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What Is An FPO?
An FPO or Follow-on Public Offer, is a process where a company that is already listed on a stock exchange issues additional shares to the public. Unlike an Initial Public Offering (IPO), where a company offers its shares to the public for the first time, an FPO involves a company that is already publicly traded and wants to raise more capital or change its ownership structure.
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The growing participation of retail investors has set up the primary market to a new level. As of 31st July 2024, 24 companies have raised ₹42,318 crore in this financial year alone (as per Prime Database) as either FPOs, Initial Public Offers (IPOs) or Offer For Sale (OFSs).
A recent example was the Vodafone Idea Limited FPO that took place in April 2024. It raised ₹18,000 crores by offering 16,363,636,363 equity shares at a price band of ₹10 to ₹11 per share. The FPO was aimed at strengthening the company’s financial position and expanding its network infrastructure.
What Are The Steps That A Company Must Follow To Issue An FPO?
Applying for an FPO involves a series of steps that a company must follow to comply with regulatory requirements with the Securities and Exchange Board of India (SEBI). Here’s how the process goes:
Step 1: Appointment Of Intermediaries
The company appoints intermediaries such as investment banks and underwriters. They assist in preparing for the FPO, including pricing, distributing shares and ensuring regulatory compliance.
Step 2: Preparation Of Offer Document
The company prepares an offer document that contains detailed information about the FPO. This includes details such as the size of the offering, number of shares issued, how many shares are there for retail investors and other investors, issue date, the lot size, and other relevant information.
Step 3: Filing with SEBI
Once the offer document is ready, it is filed with SEBI for approval. The document must comply with SEBI’s disclosure requirements, ensuring transparency and providing potential investors with enough information to make decisions on whether to invest or not.
Step 4: Pricing
After SEBI approves the offer document, the company sets a price per share for the FPO. This price can be influenced by various factors including the company’s book value, current market price, fundamentals, future growth potential, demand for the issue, and overall market sentiment.
Step 5: Opening And Closing Of FPO
Opening date is when the company opens the FPO for a specific period during which you can place your applications for purchasing shares. Once the bidding or application period ends, the company closes the FPO.
Step 6: Allotment And Listing
After the FPO application period, the company allots shares to the investors who applied during the offer period. Finally, the newly issued shares are listed on the stock exchanges, making them available for trading in the secondary market.
Types Of FPO
There are two main types of FPOs:
Dilutive FPO
In this type of FPO, the company issues new shares, increasing the total number of shares outstanding. This dilutes the value of existing shares but helps the company raise additional capital for various needs like paying off debt or funding new projects. In dilutive FPO, the earnings per share of the existing shareholders is affected.
Non-Dilutive FPO
In this case, existing shareholders, such as company promoters or major investors, sell their shares to the public. This doesn’t increase the total number of shares but changes the ownership structure. The proceeds i.e., the money raised through FPOs go to the selling shareholders, not the company. In such FPOs, the earnings per share does not go through any change.
How Is It Different From An IPO?
Here are the differences between an FPO and an IPO:
| Basis of difference | FPO | IPO |
| Stage | FPO is for companies already listed on the stock exchange. | An IPO occurs when a company offers its shares to the public for the first time. |
| Price | FPO prices are generally lower than the current market price to attract new investors. | IPO prices are often determined through a book-building process or fixed price. |
| Risk | FPOs are considered less risky since investors can analyse the company's past performance. | IPOs are typically riskier because they involve companies with no public trading history. |
| Impact on share capital | A dilutive FPO leads to a dilution of existing shareholders' ownership stake, as the total number of outstanding shares increases. Share capital remains the same in case of non-dilutive FPOs. | While, IPO is the first time a company offers its shares to the public, therefore increasing its share capital. |
| Regulatory Requirements | They are exposed to comparatively fewer regulatory requirements than IPOs. But they are still required to comply with the regulatory laws by SEBI. | IPO have numerous regulatory requirements such as corporate goverance standards, reporting the financial numbers and other regulatory compliances. |
What Should You Opt for – FPO or IPO?
Choosing between an FPO and an IPO depends on your investment style and risk tolerance. If you prefer a potentially higher reward and are willing to take on more risk, an IPO might be suitable. However, if you want a less risky investment with a company that has a track record, you can consider an FPO. With an IPO, you have less historical data to analyse. Meanwhile, FPOs offer more transparency since the company is already listed, and you can review its market performance.
Wrapping Up
Both FPOs and IPOs present investing opportunities for new investors. An FPO is a safer bet if you prefer investing in companies with a proven track record. On the other hand, an IPO might be in your interest if you’re looking for potentially higher returns with a new market entrant.
FAQs
What is an FPO?
FPO, also known as a Follow-on Public Offer, is when a publicly listed company issues additional shares to raise more capital.
What is an IPO?
An IPO, also as Initial Public Offering, is the first time a company offers its shares to the public to raise capital.
How many types of FPOs are there?
There are two types: Dilutive FPO and Non-Dilutive FPO. In a Dilutive FPO, the company issues new shares, increasing the total number of shares outstanding. While in a Non-Dilutive FPO, existing shareholders sell their shares and the number of outstanding shares in a company doesn’t increase.
Why do companies issue FPOs?
Companies issue FPOs to raise additional capital, pay off debt or change the ownership structure of the organisation.
Which is riskier, IPO or FPO?
IPOs are generally riskier because the company has no public trading history. FPOs are less risky in comparision as the company is already listed.
Can new investors buy shares in an FPO?
Yes, both existing and new investors can buy shares in an FPO.
Is the price of shares in an FPO lower than the market price?
Yes, the issue price in an FPO is usually lower than the current market price to attract new investors.
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