What is FPO in Stock Market? Types, Advantages, Disadvantages, Examples & FPO vs IPO

What is FPO in Stock Market?

In the context of the stock market, FPO stands for Follow-on Public Offering. It is a type of public offering where a company that is already publicly traded issues new shares to the public, normally to raise additional capital.

An FPO is similar to an Initial Public Offering (IPO) but still there are some basic differences because IPO involves the sale of shares to the public. However, in an FPO, the company is already listed on a stock exchange and the shares being sold are already publicly traded.

FPOs can be used by companies for a variety of purposes, such as funding expansion or paying off debt. Existing shareholders may also choose to sell some of their shares in the FPO.

Investors considering an FPO should carefully review the company’s prospectus, which provides detailed information about the offering and the company’s financials. As with any investment, it is important to conduct thorough research and seek professional advice before making any investment decisions.

How FPO is different from IPO?

Despite several similarities we can say FPO (Follow-on Public Offering) and IPO (Initial Public Offering) are two different ways for companies to raise capital from the public by selling shares of their company. Here are few key differences between FPO and IPO:

1. Timing: An IPO is the first time a company offers its shares to the public, while an FPO takes place after a company has already gone public and its shares are already trading in the stock market.
2. Purpose: An IPO is typically used by a private company to raise capital to fund its growth or expansion, while an FPO is usually used by a public company to raise additional capital for various reasons, such as financing acquisitions, repaying debt, or funding research and development.
3. Price Discovery: In an IPO, the company and its underwriters determine the offering price for the shares, often through a book-building process that involves gauging investor demand. In contrast, the price of an FPO is typically determined by the prevailing market price of the company’s shares, which can be influenced by a range of factors including investor sentiment and market conditions.
4. Regulatory Requirements: IPOs are subject to more rigorous regulatory requirements, such as the need to file a detailed prospectus with the SEC, than FPOs, which typically involve fewer regulatory hurdles since the company is already publicly traded.
5. Investor Base: IPOs tend to attract more retail investors, while FPOs are more commonly subscribed by institutional investors, such as mutual funds and pension funds, who are looking to add to their existing holdings of the company’s shares.

How a Follow-on Public Offer (FPO) Works:

1. Company decides to raise capital: The company decides it wants to raise additional capital and determines how many shares it wants to issue in the FPO.
2. Underwriters are hired: The company hires investment banks or broker-dealers to act as underwriters for the FPO. The underwriters help determine the offering price, market the shares to potential investors, and manage the logistics of the offering.
3. SEC filing: The company files a registration statement with the Securities and Exchange Commission (SEC) that discloses detailed information about the offering and the company’s financials.
4. Offering price is set: The underwriters and the company determine the offering price for the shares. This may be done through a book-building process, which involves gauging investor demand for the shares and setting the price accordingly.
5. Shares are sold: The shares are sold to investors through the underwriters, who may market the shares to their clients and other potential investors. The shares are typically sold at the offering price, although the market price may fluctuate once the shares begin trading in the secondary market.
6. Proceeds are used: The company receives the proceeds from the sale of the shares and may use them for a variety of purposes, such as funding expansion or paying off debt.
7. Shares begin trading: The new shares begin trading on the stock exchange alongside the company’s existing shares. The market price of the shares may be influenced by a range of factors, including investor sentiment, market conditions, and the company’s financial performance.

Types of Follow-on Public Offers (FPOs):

1. Dilutive FPO: In a dilutive FPO, the company issues new shares to the public, which increases the total number of outstanding shares and dilutes the ownership stake of existing shareholders. A dilutive FPO is typically used when the company needs to raise a significant amount of capital and is willing to dilute existing shareholders in order to do so.
2. Non-Dilutive FPO: In a non-dilutive FPO, the company does not issue new shares to the public. Instead, the company’s existing shareholders, such as the founders, insiders, or large institutional investors, sell their shares to the public. The proceeds from the sale go to the selling shareholders, not the company. A non-dilutive FPO is typically used when existing shareholders want to cash out their shares, but the company does not need to raise additional capital.
3. Rights Issue: A rights issue is a type of FPO where existing shareholders are given the right to purchase additional shares of the company at a discounted price. The purpose of a rights issue is to give existing shareholders the opportunity to maintain their ownership stake in the company and to raise additional capital at the same time.
4. Institutional Placement Program (IPP): An IPP is a type of FPO where the company sells shares to institutional investors, such as mutual funds or pension funds, in a private placement. The shares are not offered to the general public. An IPP is typically used when the company wants to raise capital quickly and efficiently without the need for a full-blown public offering.

Advantages:

1. Capital raising: An FPO can provide a company with a quick and efficient way to raise capital by issuing new shares to the public or by allowing existing shareholders to sell their shares. This capital can be used to fund expansion, pay off debt, or for other corporate purposes.
2. Increased liquidity: An FPO can increase the liquidity of a company’s stock by increasing the number of shares outstanding and potentially attracting new investors. This can lead to a more active and efficient secondary market for the company’s stock.
3. Lower cost than an IPO: An FPO can be less expensive than an initial public offering (IPO) because the company is already publicly traded and has an established market presence. This can result in lower underwriting fees and other costs.
4. Market credibility: An FPO can enhance a company’s market credibility by signalling to investors that the company is financially stable and has growth potential.

Disadvantages:

1. Dilution: An FPO can dilute the ownership stake of existing shareholders if the company issues new shares to the public. This can result in a lower earnings-per-share (EPS) ratio and potentially lower stock prices.
2. Market timing risk: An FPO may be affected by market conditions, and if the market is unfavourable, the offering price may be lower than expected, which could impact the amount of capital raised.
3. Regulatory requirements: FPOs are subject to regulatory requirements and disclosures, which can be time-consuming and expensive. The company must also comply with ongoing reporting and disclosure requirements after the offering.
4. Investor perception: If investors perceive an FPO as a desperate attempt to raise capital or as an indication of financial weakness, it could harm the company’s reputation and stock price.

Examples of FPO in Stock Market:

1. Facebook: In 2012, Facebook launched an FPO to raise additional capital after its initial public offering (IPO) in May of the same year. The FPO raised approximately $16 billion through the sale of around 421 million shares.
2. Alibaba Group: In 2019, Alibaba Group launched an FPO in Hong Kong to raise additional capital. The FPO raised approximately $13 billion through the sale of 500 million shares.
3. Uber Technologies: In 2019, Uber Technologies launched an FPO to raise additional capital after its IPO in May of the same year. The FPO raised approximately $8.1 billion through the sale of 180 million shares.
4. Reliance Industries: In 2020, Reliance Industries, a conglomerate in India, launched an FPO to raise capital for reducing debt and funding expansion. The FPO was a combination of fresh issue of shares and an offer for sale by existing shareholders. The FPO raised approximately $7 billion.
5. HDFC Bank: In 2020, HDFC Bank, one of India’s largest private sector banks, launched an FPO to raise capital for growth and expansion. The FPO raised approximately $1.8 billion.
6. ICICI Bank: In 2020, ICICI Bank, a leading private sector bank in India, launched an FPO to raise capital for business growth and regulatory requirements. The FPO raised approximately $2 billion.
7. Petrobras: In 2010, Petrobras, a Brazilian oil company, launched an FPO to raise additional capital. The FPO raised approximately $70 billion, making it one of the largest ever in history.
8. Japan Post Holdings: In 2015, Japan Post Holdings launched an FPO in Tokyo to raise additional capital. The FPO raised approximately $12 billion through the sale of 1.4 billion shares.

Summary: FPOs are an important tool for companies to raise capital in the stock market and can provide opportunities for investors to participate in the growth of these companies. However, investors should be prudent and carefully evaluate the potential benefits and risks associated with FPOs before making any investment decisions.

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