These FPOs involve the issuance of new shares by a company to public investors. This will dilute the ownership stake of existing shareholders, as they will now own a smaller percentage of the company. But for the company, it’s a way to gather money for growing and expanding its business. Many Indian enterprises have used an FPO to obtain extra money by issuing new shares. The FPO issuance had a lot size of 21 shares, with a total issue size of Rs 4,300 crores. It’s when a company that’s already listed on the stock market issues more shares to raise additional funds from the public.
Let’s understand how FPO works through a classic example of a government-owned company, IRFC. Dilutive FPO helps in achieving this goal where new shares are offered and new money is generated. It can also be used to improve the company’s growth by financing new projects.
FPOs are basically used by companies to diversify their equity base and raise capital for business. This capital can be used for multiple purposes such as to meet the company’s expenses, business expansion, debt reduction and more. The two main types of FPOs are dilutive—meaning new shares are added—and non-dilutive—meaning existing private shares are sold publicly.
- It is theoretically possible for a corporation to issue an unlimited number of follow-on public offerings.
- Don’t confuse FPOs (Follow-on Public Offerings) with the Initial Public Offering (IPO) of equity to the public.
- The shares had a face value of Rs 2 with a price band of Rs 615 to Rs 650 per share.
- A follow-on public offering (FPO) is the issuance of shares to investors by a company listed on a stock exchange.
The FPO does have a lot of benefits, but it is not devoid of disadvantages. There is one limitation of the process that must be known to the companies before they issue additional shares to the investors/shareholders. The follow-on public offering is a scheme that has multiple benefits.
- SEBI decided to introduce QIP in India to encourage the listed companies in India to raise funds from domestic players rather than foreign capital.
- He is recognised for his commitment, professionalism, and leadership in work.
- The lot size for the FPO issue was 21 shares, with the issue size amounting to Rs 4,300 crores.
- Such an FPO is undertaken by the company to fund expansion activities or pay for debts.
What Are the Benefits of Follow-On Public Offers (FPOs)?
IPO or Initial Public Offering is a financial process that allows private companies to raise capital by issuing shares to the general public for the first time. Because no new shares are created, the offering is not dilutive to existing shareholders, but the proceeds from the sale do not benefit the company in any way. Usually however, the increase in available shares allows more institutions to take non-trivial positions in the company. A non-dilutive offering is therefore a type of a secondary market offering. In many cases, these shareholders are company founders, members of the board of directors, or pre-IPO investors. Non-diluted follow-on offerings are also called secondary market offerings.
Dilutive Follow-on Public Offers:
Since the investors like to follow the smart money, thus the stock prices have generally risen to post the QIPs. SEBI decided to introduce QIP in India to encourage the listed companies in India to raise funds from domestic players rather than foreign capital. Offer for Sale is a simple mechanism used by the promoters or non- promoters (holding at least 10% of the share capital of the company) to reduce its stake in the company. An FPO is often considered preferable to an IPO as investors already have knowledge of the company’s management, business model, and growth potential. With an MBA in Finance and over 17 years in financial services, Kishore Kumar has expertise in corporate finance, mergers, acquisitions, and capital markets. He is recognised for his commitment, professionalism, and leadership in work.
An FPO is used to obtain more cash and pay off any existing debt of the firm. After a successful Initial Public Offering (IPO), all public issues are referred to be FPOs. So, this blog will cover FPO basics, why companies choose them, and what to consider before investing. However later in February 2020, ITI withdrew its FPO citing prevailing market conditions.
In comparison to FPOs, an IPO can provide higher returns for investors and may turn out to be profitable for them. During the 1980s and 1990s, policy planners realized that a well-developed capital market is essential for sustainable growth in an emerging market economy like India. A package of reforms aimed at enhancing market quality in terms of effectiveness, transparency, and pricing policies was introduced shortly.
What is the purpose of the FPO?
The increased investment opportunities with a company reflect its potential growth prospects. Some companies may also conduct follow-on offerings in order to raise capital to refinance debt during times of low interest rates. Investors should be cognizant of the reasons that a company has for a follow-on offering before putting their money into it. The price of follow-on shares is usually at a discount to the current, closing market price. Also, FPO buyers need to understand that investment banks directly working on the offering will tend to focus on marketing efforts rather than purely on valuation.
What Happens in an FPO?
A company dilutes its Equity by raising more shares as it might not be able to raise cash from banks or NBFC’s due to weak Balance Sheets what is follow on public offer or inadequate collaterals. Theoretically, there’s no limit on the number of Follow-On Public Offerings a company may issue. However, making too many FPOs can lead to significant dilution of ownership and erosion of shareholder wealth. The perception of an FPO being good or bad varies; it can be positive as it raises capital but may dilute existing shares. Private entities generally use IPOs to expand their funds, while government entities use FPOs to reduce their stake in the company or cover their debts. At-the-market (ATM) offerings offer various benefits, including minimal market impact.
What Is A Follow-on Public Offering?
A follow-on offering (FPO) is when a public company issues more shares after their initial public offering (IPO). It happens when the company wants to raise more capital by giving out additional shares to finance projects, pay their debt, or make acquisitions. In an at-the-market FPO, companies issue new shares to the public at the current market price.
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An initial public offering (IPO) bases its price on the health and performance of the company, and the price the company hopes to achieve per share during the initial offering. Since the stock is already publicly-traded, investors have a chance to value the company before buying. An at-the-market (ATM) offering gives the issuing company the ability to raise capital as needed. If the company is not satisfied with the available price of shares on a given day, it can refrain from offering shares. ATM offerings are sometimes referred to as controlled equity distributions because of their ability to sell shares into the secondary trading market at the current prevailing price. An IPO is the process through which a company issues its shares to the general public for the first time.
Unlike an FPO, an IPO occurs when a private company issues shares to the public for the very first time through a stock exchange. An at-the-market offering (ATM) is a type of FPO by which a company can offer secondary public shares on any given day, usually depending on the prevailing market price, to raise capital. There are two different kinds of FPOs that companies can opt to issue – dilutive FPOs and non-dilutive FPOs. In a dilutive FPO, the company issues more shares to the investors, which has the effect of diluting the control of the company.
The only reason why any investor would go for FPOs over listed shares is because of the price advantage. So many investors engage in arbitrage when they buy shares in the FPO at a discounted market price and then sell it in the market to get a premium on their transaction. Whereas, when the company releases the shares previously owned by a promoter group or privately held to the general public, shares may not increase. If the number of shares grows, even in the case of existing shares issued to the public, the issue will again dilute. There are several reasons why a public company will choose to raise more equity.
An FPO is typically done when the company wants to fund new projects or expansions, pay off debt, or increase its working capital. The shares are offered at a fixed price to the public through a book-building process, with the proceeds going directly to the company. Public companies can also take advantage of an FPO through an offer document.