What is FPO in Stock Market? - Full Form, Meaning, How to Apply

Follow-on Public Offering (FPO), a process through which publicly listed companies issue shares to the public to raise funds like Initial Public Offering (IPO), which marks its first entry in the stock market, an FPO is a subsequent offering by an already listed company. 

This article provides an in-depth exploration of FPOs, covering their meaning, types, operational mechanics, application process, purpose and regulatory guidelines.

FPO Full Form

The term FPO stands for Follow-on Public Offering. An FPO refers to the issuance of additional shares by a publicly listed company to raise capital again after its initial public offering (IPO). It allows the company to tap into the capital markets again, offering investors an opportunity to purchase newly issued or existing shares.

What is a Follow-on Public Offer (FPO)?

A Follow-on Public Offer (FPO) is a method of raising capital by a company that is already listed on a stock exchange (NSE, BSE). Through the FPO process, the company issues equity shares to the public or institutional investors by a dilution or non-dilution method. 

This entire process is same like IPO, which is the first instance of a company offering its shares to the public to become a listed entity, whereas FPOs are to raise additional funds for various purposes after getting listed in the exchange, such as business expansion, debt repayment, or operational financing.

FPO’s are one of the way in capital markets to raise the capital efficiently while providing investors with opportunities to invest in established firms. 

Types of FPO

FPOs are mainly classified into two types, based on their structure and purpose:

Dilutive FPO: 

An FPO will called as a dilutive FPO, when company issues new shares to the public by increasing their total number of outstanding shares. This results in the dilution of existing shareholders ownership percentages, as the same equity is now spread across a larger number of shares.

The funds that the company is aiming to raise through a dilutive FPO will go directly to the company for its use, like funding expansion projects, acquisitions, or reducing debt.

Example: A company with 10 million shares outstanding issues 2 million new shares in a dilutive FPO, increasing the total shares to 12 million.

Non-Dilutive FPO:

In a non-dilutive FPO, the company offers existing shareholders such as promoters, venture capitalists, or institutional investors an opportunity to sell their shares to the public.

The company does not issue new shares to the public hence the total number of outstanding shares remains same, and there will be no dilution of ownership for other shareholders.

The funds(proceeds) from a non-dilutive FPO directly go to the selling shareholders rather than the company.

Example: A promoter sells 1 million of its existing shares to the public in an FPO, and the company does not create new shares.

Both types of FPOs serve distinct purposes and are chosen based on the company’s financial strategy and the objectives of its shareholders.

How does Follow-on Public Offering (FPO) Works?

FPO is a process that involves a certain step-by-step process to ensure compliance with SEBI requirements and transparency for investors. Here’s a step-by-step breakdown of how an FPO works:

Board Approval:

• Once the company wants to go with the FPO, whether it may be dilutive or non-dilutive initially the company’s board of directors approves the decision to raise capital through an FPO. 
• This total process involves determining the number of shares to be issued, the type of FPO (dilutive or non-dilutive), and the intended use of funds by the company.

Appointment of Intermediaries:

• When the Board of Directors of the company approves the FPO, the company immediately appoints investment banks, underwriters, a registrar and legal advisors to manage the FPO process. 
• These intermediaries help the company by assisting in preparing the offer document, pricing the shares, and marketing the offering.

Filing with Regulatory Authorities:

• After completing the appointment of the intermediaries with the help of them the company submits a Draft Red Herring Prospectus (DRHP) & Red Herring Prospectus (RHP) to the regulatory authority Securities and Exchange Board of India (SEBI). 
• This prospectus contains detailed information about the company’s financial history, business operations, risks, and the purpose of the FPO.

Pricing the FPO:

• Once the company submits the Draft Prospectus with the help of intermediaries the price of the shares is determined through either a fixed price method.
• Where the company sets a specific price or it sets a Price Band where investors can bid in their range.

Subscription Period:

• The company gives the official press release regarding the FPO tentative timeline.
• Which includes the details of the subscription period, allotment date, shares credit date and listing date, where investors like retail, institutional, or high-net-worth individuals can participate in the FPO by bidding for shares. 
• The subscription for the IPO will be 3 Days, including the opening and closing dates.

Allotment of Shares:

• After the subscription period closes, the assigned registrar will release the allotment status within one working day to the public, where most of the allotments are based on a lottery basis to ensure transparency.

Credit of Shares:

• The shares are credited into your demat account(if you got allotted the shares) in one working day once the allotments are out for public, ideally a day before the listing day.

Listing and Trading:

• If you have allotted the shares on the listing day of the FPO at 10:00 AM, you can sell your shares at its CMP directly using your Stockbroker.

How to Apply for an FPO?

If you are interested in participating in any upcoming FPO, you can follow these below mentioned steps:

Check Eligibility:

• You need to make sure that you have a funded bank account with an active demat and trading account with a SEBI-registered stockbroker to hold the shares. 
• A trading account with a broker is also necessary to apply through online platforms.

Review the Offer Document:

• Once the FPO launches, you should study the RHP, DRHP & other offer documents to understand the company’s history, financial details, objectives of the FPO, risks, and pricing details.

Choose the Application Method:

For applying FPO, there are two methods such as online and offline.

• Online Application: Investors can apply through their stockbroker’s online platform or mobile application by using the registered bank’s UPI as the payment method.
• ASBA: ASBA is the most used method to apply the IPO directly using the bank's net banking portal, here the amount gets blocked in your account if shares allotted the funds will gets debited if not funds will gets unblocked.
• Offline Application: If investors wants to proceed with offline manner they can submit physical application forms through banks or brokers by filling in all the required details.

Select the Investor Category:

Before applying for the IPO you need aware which category you will fall under

FPOs typically reserve shares for different investor categories, such as 

1. Retail investors (investment less-than 2Lakh)
2. Non-institutional investors (NII),  (investment above 2Lakh)
3. Qualified institutional buyers (QIBs). (Minimum investment of 10 crore in Mainboard)

Choose the appropriate category based on your investment size.

Once you done with the application process and sit relaxed and track the allotment process and wait for the listing day to get the new shares list on exchanges.

Why Does a Company Need an FPO?

Companies undertake FPOs for several strategic and financial reasons, including:

Raising Capital:

• FPOs are aimed at raising funds for their business, operations, entering new markets, investing in R&D, and sometimes for diluting the promoter’s stake.

Reduction of Debt:

• Companies sometimes use FPO as an option to clear their existing debts and become debt-free by raising funds from the public.

Funding Acquisitions:

• Sometimes FPOs will come up to raise funds to finance the upcoming mergers and acquisitions to acquire the stake of competitors or complementary businesses.

Promoter Exit or supposition:

• In a non-dilutive FPO, promoters or early investors may sell their shares to exit their investment or diversify their portfolio.

Increasing Public Holding:

• Companies Issuing additional shares via the FPO process to increases the company’s public float which directly helps in improving the liquidity and gets attracted with more investors.

Market Opportunities:

• A strong market environment may prompt a company to raise capital at favourable valuations through an FPO, which they may use for future requirements.

FPO Guidelines in India

The Securities and Exchange Board of India (SEBI) is the regulatory body in India that regulates the entire securities market, including equity, debt and derivative segments and takes care of the investors' interests.

Regulatory Approval:

If any company wants to come up with an FPO, it must get clearance from the SEBI, It includes submitting detailed offer documents like DRHP & RHP for the regulatory review.

Disclosure Requirements:

The FPO offer document must disclose comprehensive information about the company like,

• Financial performance of the past 3 years.
• Risks associated with the company.
• Management details.
• Reason for the FPO.
• Type of FPO.

Pricing Regulations by SEBI:

SEBI sometimes will impose rules on pricing mechanisms, such as mandating a book-building process for fair price discovery or setting a minimum price floor for the FPO.

Investor Allocation:

Sometimes SEBI will mandate the minimum allocation of shares to different investor categories, such as 

1. Retail Investors.
2. Institutional Investors.
3. Non Institutional Investors(NII).
4. High-net-worth individual Investors(HNI).
5. Qualified Institutional Investors(QII).

Lock-in Periods IN FPO:

In some cases, like Private Placements and Angel Investors category, the shares held by promoters or angel investors may be subject to lock-in periods of 3-6 months to prevent immediate selling after the FPO.

Listing Rules:

The company must comply with the stock exchange’s NSE & BSE rules for listing requirements, including allocating the minimum public shareholding norms, and the company should follow the corporate governance standards.

Underwriting and Intermediary Oversight:

The assigned Investment banks, Registrar and underwriters involved in the FPO must adhere to regulatory standards to ensure fair practices in marketing and allotment.

Example: SEBI’s Issue of Capital and Disclosure Requirements (ICDR) Regulations govern the FPOs, ensuring transparency and investor protection. Similar frameworks exist globally, tailored to their market conditions in their country.

Conclusion

A Follow-on Public Offer (FPO) is a common method used by listed companies to raise additional capital from the public by issuing new shares or allowing existing shareholders(promoters) to sell their shares. By understanding the mechanics, types, and purposes of FPOs, stakeholders can make informed decisions in the capital markets, contributing to the growth of businesses and the economy at large.

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