FPO in Stock Market: Meaning and Types

FPO in Stock Market: Meaning and Types

6 mins readComment
Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Dec 28, 2023 01:45 IST

An FPO, or Follow-on Public Offering, is a process where a publicly traded company issues additional shares to investors after an initial public offering (IPO). It's a strategy for companies to raise further capital, often for expansion or debt reduction, leveraging their established presence in the stock market.

An FPO, or Follow-on Public Offering, in the stock market, is like a second round of fundraising for a company that's already publicly traded. Imagine a tech company that went public with an IPO and is now well-established. To expand further or pay off debt, it decides to raise more money. This time, instead of an IPO, it launched an FPO, offering more shares to the public. This helps the company get the necessary funds without increasing debt, offering new investment opportunities to the public.

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Table of Content

What is FPO in Stock Market?

FPO full form in the stock market is Follow-on Public Offering. FPO refers to a process where a company, already publicly traded, issues additional shares to investors. This is done post its Initial Public Offering (IPO). Companies typically pursue an FPO to raise extra capital for expansion, debt reduction, or other corporate activities. It's a way for companies to capitalize on their market presence and investor interest to secure additional funding.

How a Follow-on Public Offer (FPO) Works

A Follow-on Public Offer (FPO) works as a subsequent issuance of shares by a company that is already publicly listed. Here's the process:

Decision to Issue: The company decides to raise additional capital post its Initial Public Offering (IPO) for various purposes like expansion, debt reduction, or improving financial structures.

Regulatory Approval: The company must obtain approval from regulatory authorities (like the Securities and Exchange Board in India or the Securities and Exchange Commission in the U.S.) to proceed with the FPO.

Pricing the Shares: The company sets a price for the new shares. This can be done through a fixed price method or a book-building process where the price is determined based on investor demand.

Public Announcement: The company announces the FPO to potential investors, often detailing the number of shares to be issued, the price range, and the purpose of the capital raise.

Subscription: Investors subscribe to the FPO by purchasing the newly issued shares. Existing shareholders may get a preference or rights to buy shares to maintain their ownership percentage.

Allocation of Shares: After the subscription period ends, shares are allocated to investors. The allocation process may vary based on investor type and the subscription model used.

Listing and Trading: The new shares are listed on stock exchanges for trading. This increases the total number of shares available in the market for the company, potentially diluting the ownership of existing shareholders.

Utilization of Funds: Finally, the company utilizes the raised funds for its declared purposes, which should ideally contribute to the company's growth and value enhancement.

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Types of FPO

There are two main types of Follow-on Public Offers (FPOs) in the stock market, each with its unique characteristics and methods of issuing shares:

Dilutive FPO:

In a dilutive FPO, the company issues new shares, increasing the total number of shares outstanding. This results in the dilution of the existing shareholders' equity, as their ownership percentage decreases.

Example: Suppose a company ABC Ltd. has 1 million shares outstanding. It issues an additional 500,000 shares in a dilutive FPO. This increases the total shares to 1.5 million, diluting the ownership percentage of existing shareholders.

Non-Dilutive FPO:

In a non-dilutive FPO, there are no new shares issued. Instead, major shareholders or promoters of the company sell a part of their existing shareholdings to the public. This does not affect the total number of shares outstanding, thus there's no dilution in ownership percentage.

Example: If a founder of XYZ Ltd., who owns a significant number of shares, decides to sell a part of their stake in a public offering, it constitutes a non-dilutive FPO. The total share count of the company remains the same, but the founder's shareholding percentage decreases while the public's shareholding increases.

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Example of a Follow-on Public Offer (FPO)

A recent example of a Follow-on Public Offer (FPO) in the Indian stock market is the case of Indian Telecom Industries Ltd. (ITI Ltd.). ITI Ltd., a Bangalore-based public sector telecom manufacturing company, initiated an FPO by issuing 18 crore shares within a price band of Rs 71 to 77 per share. The primary objective was to increase public shareholding and dilute the government's stake, which was above 85% in January. However, ITI withdrew its FPO in February 2020 due to prevailing market conditions. This example highlights how FPOs are used by companies to adjust ownership stakes and raise additional capital.

What is the Difference between IPO and FPO?

Aspect

Initial Public Offering (IPO)

Follow-on Public Offering (FPO)

Definition

First sale of stock by a company to the public.

Issuance of shares by a company to raise additional capital after IPO.

Occurrence

Occurs when a company goes public for the first time.

Occurs after the company is already publicly listed.

Purpose

To raise capital for expansion, pay debt, or improve infrastructure.

To fund expansion activities, pay for debts, or change the shareholding pattern.

Share Type

Involves issuing new shares.

Can involve issuing new shares (dilutive) or selling existing shares (non-dilutive).

Impact on Share Capital

Increases as new capital is introduced to the public.

May or may not increase, depending on the type of FPO (dilutive or non-dilutive).

Pricing

Price is often set within a range through book-building or fixed pricing.

Typically offered at a discount to current market price to attract investors.

Investor Risk

Generally higher as it's the company's first public sale.

Comparatively lower as there's existing performance data.



Wrapping It Up!

An FPO in the stock market is a strategic move by publicly listed companies to issue additional shares post-IPO, serving various purposes like expansion or debt repayment. There are two types, dilutive and non-dilutive, each with distinct impacts on share count. Real-world examples, like ITI Ltd.'s FPO, illustrate its practical application. Understanding the differences between IPOs and FPOs is crucial for investors, highlighting the evolving financial strategies of public companies in capital markets.

Top FAQs on FPO in Stock Market

What is an FPO in the stock market?

An FPO, or Follow-on Public Offering, is when a publicly traded company issues additional shares to investors after an Initial Public Offering (IPO). It's a way for companies to raise more capital.

How is an FPO different from an IPO?

An IPO is the first sale of stock by a company to the public, while an FPO occurs after the company is already listed and wants to offer more shares.

What are the types of FPO?

There are two types: dilutive, where new shares increase the number of outstanding shares, and non-dilutive, where existing shareholders sell their shares without increasing the total count.

Why do companies opt for an FPO?

Companies choose FPOs to raise additional capital for reasons like expansion, debt repayment, or changing the shareholding pattern.

About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio