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Key Highlights
- An FPO (Follow-on Public Order) is the additional issuance of shares that is initiated by a company and is also known as a secondary offering.
- An FPO is usually issued so that a company can either raise capital or reduce debt.
- There are two types of FPOs, dilutive and non-dilutive. Each FPO has different characteristics.
In the fast-moving world of finance and trading, understanding various market instruments is of the utmost importance. One example of a concept that is very crucial to learn is that of the FPO (follow-on public) order) in stock market .If you are wondering what is FPO in stock market, all your questions will be answered in this blog. We will look at the meaning of FPO in stock market and understand how the FPO in stock markets work. Moreover, we will also be exploring the different types of FPO in stock market and why companies issue FPO in stock market in the first place.
What is FPO?
FPO stands for follow-on public order. It is popularly known as a secondary offering. An FPO in stock market is issued by the company after its initial IPO (Initial Public Offering) has already been finished.Through an FPO, a company gains access to more capital by issuing new shares. Existing shareholders or new participants can use this opportunity to buy more shares of the company so that they can have more equity in the company.
Why is an FPO Issued?
Now that you know what an FPO in share market is, it is important to understand why it is issued. An FPO in stock market is issued for various reasons, such as:
- Raising Capital
One of the major reasons for issuing an FPO in capital market is because a company wants to raise more capital. The raised capital can be used in multiple ways to help the company.
- Pay Off Debt
The capital raised by issuing the FPO can be used by the company to pay off its outstanding debt. The surge in liquidity caused by the FPO can help the company manage outstanding loans.
- Fund New Projects
Another reason for raising new capital by issuing an FPO is to fund new projects that are taken up by a firm. If a company is venturing into a new domain and wants to raise more capital, an FPO in stock market can be the way to go.
Types of FPO
Now, let's learn about the different types of FPOs:
- Dilutive FPO
In a dilutive FPO, new shares are issued by the company so that capital can be raised. Due to this, the overall ownership of existing owners gets diluted.
- Non-Dilutive FPO
In a non-dilutive FPO, there are no new shares that are made available for sale. The existing ownership of shareholders remains the same.
- At-the-Market FPO
An at-the-market (ATM) FPO is a type of FPO where a company can continuously sell its shares to the public over a specific period, usually at the current market price.
How a Follow-on Public Offer (FPO) Works
Here is how an FPO works:
- Announcement: The company announces its intention to issue new shares through an FPO.
- Price Determination: The company, along with its investment bankers, determines the issue price.
- Offer Period: A specific period is set during which investors can place bids for the shares.
- Bidding Process: Investors can submit bids through their brokers or directly to the registrar.
- Allocation: The shares are allocated to investors based on a predetermined process, which may involve a combination of factors like retail quota, institutional quota, and a price-based allocation.
- Listing: Once the FPO is successful, the new shares are listed on the stock exchange, and trading begins.
Example of an Follow-on Public Offer (FPO)
For example, in 2021, Paytm, a leading digital payments and financial services company, launched its Follow-on Public Offer (FPO) to raise additional capital. This FPO aimed to strengthen the company's financial position and fuel its growth initiatives.
FPO vs IPO
An Initial Public Offering (IPO) is the first time a private company offers its shares to the public, making it a publicly-traded company. It's a significant step for a company to raise capital and expand its operations. On the other hand, an FPO is the issuance of additional shares by an already listed company to raise further capital. While IPOs are for companies making their debut on the stock market, FPOs are for companies that are already listed and want to raise more funds for various purposes like expansion, debt reduction, or acquisitions
Learning about FPO in Capital Markets is Essential
Understanding what is FPO is crucial for both companies and investors in today's financial landscape. Whether it's a dilutive FPO in stock market or a non-dilutive FPO, these offerings represent a valuable tool for raising capital and achieving financial objectives.For investors, grasping the concept of FPO in stock market is essential. It's a key mechanism in the capital market that influences stock prices, company valuations, and investment strategies.Remember, while FPOs can present good investment opportunities, it's always important to do thorough research and consider your financial goals before making any investment decisions. Also Read: The ABC of IPOs in India: A Beginner's Guide
FAQS - FREQUENTLY ASKED QUESTIONS
What is FPO and how does it differ from an IPO
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How does an FPO in the capital market affect existing shareholders?
An FPO can potentially dilute the value of existing shares if new shares are issued. However, it can also be positive if the funds raised are used effectively for company growth.
What is the main purpose of an FPO in the stock market?
The main purpose of an FPO in the stock market is for companies to raise additional capital, which can be used for expansion, debt repayment, or funding new projects.
How can I participate in an FPO in the share market?
You can participate in an FPO by submitting a bid during the offer period through your stockbroker or bank, similar to participating in an IPO.
What is the difference between a dilutive and non-dilutive FPO?
A dilutive FPO involves issuing new shares, which can decrease the value of existing shares. A non-dilutive FPO involves existing shareholders selling their shares, which doesn't affect the total number of shares.
How is the price determined in an FPO?
The price in an FPO is typically based on the current market price of the company's shares, often at a slight discount to attract investors.
What are the risks associated with investing in an FPO?
Risks include potential share dilution, market volatility, and the possibility that the company might not use the raised funds effectively. However, FPOs are generally considered less risky than IPOs.
How often can a company issue an FPO in the stock market?
There's no set limit on how often a company can issue an FPO, but it's typically done when the company needs to raise significant capital and market conditions are favourable.
Can foreign investors participate in an FPO in the Indian share market?
Yes, foreign investors can typically participate in FPOs, subject to the regulations set by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI).
What is the role of SEBI in the FPO process?
SEBI (Securities and Exchange Board of India) oversees the entire FPO process in the Indian capital market. It reviews the draft prospectus, ensures compliance with regulations, and protects investors' interests.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
