Everyone knows about IPO. IPO or initial public offering, is the first sale of shares by an unlisted company to the public. Read our IPO section to know more. But what if a company wants to raise more capital after it has done its IPO and got listed on a stock exchange?Well, it initiates an FPO, also known as further public offer or follow-on public offer.
Today in this article we will take a closer look at what is FPO?, FPO meaning in share market, types of FPO, how it is different from IPO, how to invest, and everything else you need to know about FPO.
What is FPO?
FPO, as the name suggests, is when a publicly listed company sells additional shares to all the public investors (note,not only to its existing shareholders), after it has done its IPO. FPO is done by a company to raise further capital after its IPO.
Now you know FPO full form, FPO meaning in share market, let see the different types of FPO.
Types of FPO
There are two types of FPO:
1. Diluted FPO - is when a company issues new additional shares to the public market. Diluted FPOs lead to lower earnings per share (EPS) of the company since the number of shares in circulation, or shares outstanding increases though the company’s earnings remain the same. The sale proceeds go to the company.
2. Non diluted FPO- also known as offer for sale( OFS) is when the existing shareholders of the company sell their privately held shares to the public market. In a non- diluted FPO, no new shares are issued, therefore the number of shares outstanding remains the same. The shares coming to the market already exist, they simply exchange hands from one type of investor to the other type, hence earnings per share(EPS) of the company remain unchanged. The sale proceeds go to the promoters.
Why does a company execute FPO?
A company can go for FPO due to many reasons. Following are the possible reasons:
1. To pay off its existing debt because the company wants to avoid the strict debt covenants which restrict its business operations.
2. To refinance debt during times of low interest rates.
3. To rebalance its capital structure (debt- equity ratio) to maintain it at a desired level.
4. To raise capital for the following when it does not want to increase its debt and debt interest expense:
5. investing in new projects
6. expanding its business
7. raising acquisition capital
8. To meet the SEBI norm of minimum public shareholding of 25 per cent in a listed entity.
FPO vs IPO
- Timing: An unlisted company issues its first shares and gets listed on the stock exchange through an IPO. FPO is when a listed company wants to offer shares again to the public.
- Nature of shares: In an IPO, new shares are issued and shares are divided into common shares and preferred shares.Whereas in an FPO, either new shares are issued or old shares are put on offer again. Shares on offer in an IFO are divided into diluted and non diluted shares.
- Share price: In an FPO, share prices are offered at a discount compared to the current market price to attract the investors. This instantly brings down the demand for the listed shares, thereby reducing the market price of the share to the FPO issue price.The IPO price is set by the underwriter, which is usually the investment bank, appointed by the company.
- Risk: FPOs are less riskier than IPOs because the company is already listed and we can get an estimate of how the company will perform in the future based on its present performance.
Here is a detailed article on difference between IPO and FPO.
What is the process of issuing FPO?
The Securities and Exchange Boards of India (SEBI) monitors and regulates the Indian Capital markets so as to protect the interests of the investors. It has set certain entry norms which each Indian company has to follow in order to issue an FPO:
Entry Norm 1: If the company has changed its name within the last one year, at least 50% revenue for the preceding 1 year should be from the activity suggested by the new name.
Entry Norm 2: The aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size(issue capital) does not exceed five times its pre-issue net worth as per the audited balance sheet of the preceding financial year
- Any listed company not fulfilling these conditions shall be eligible to make a public issue (i.e. FPO) by complying with QIB Route as specified for IPOs i.e. issue shall be through book building route, with at least 75% of net offer to the public to be mandatory allotted to the Qualified Institutional Buyers (QIBs).
- The issuer has to file a draft prospectus to SEBI for FPO and the company can announce its FPO only after getting approval from SEBI.
- The issuer is required to announce the floor price or price band at least one working day before the opening of the issue, in all the newspapers in which the pre issue advertisement was released. This way,the market gets adequate time to absorb the same and factor that in the decision making process.
Should you invest in an FPO?
Individual retail investors like us, should invest if they are satisfied by the company’s performance data and its prospects. Since share price offered in an FPO is usually less than the prevailing market price,investors have an arbitrage opportunity by buying the shares at reduced price and later make a profit by selling them at premium price.
How can you invest in an FPO?
You need to have a demat account, trading account and a bank account. In order to secure the stocks, you have to bid the stocks above the floor price published by the company through the brokerage terminal. The floor price is the minimum price below which a share will not be traded. All the details of the FPO can be found on the BSE and NSE site. For a given company, FPOs are offered on two trading days- one day for the non-retail or institutional investors and the next day for retail investors.
Examples of FPOs in India
There have been FPOs of many Indian companies like Tata Steel Ltd, Engineers India Ltd, Power Grid Corporation of India, Power Finance Corporation Ltd, NTPC Ltd, Yes Bank.