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

A Follow-On Public Offer (FPO) is a method through which a company that is already listed on a stock exchange issues additional shares to the public. It is a subsequent public offering made after an Initial Public Offering (IPO), where the company had originally offered its shares to the public for the first time.

An FPO enables a company to raise further capital from the market even after it has become publicly traded. It is an important financial mechanism used by companies to strengthen their financial position, fund expansion, or restructure their capital.

Meaning and Concept of Follow-On Public Offer

The term Follow-On Public Offer refers to a secondary issue of shares by an already listed company. After successfully completing an IPO and getting listed on the stock exchange, a company may require additional funds at a later stage. Instead of relying solely on debt or internal resources, it may choose to issue more shares to the public through an Follow-On Public Offer.

In simple terms, an FPO allows a company to go back to the capital market to raise additional funds. Since the company is already listed, investors have access to its financial performance, market behaviour, and management track record, which makes the process more informed compared to an IPO.

Although there is no strict legal limit on the number of Follow-On Public Offers a company may issue, frequent offerings may lead to dilution of ownership and reduction in shareholder value. Therefore, companies generally approach Follow-On Public Offers cautiously and only when there is a clear financial requirement.

Features of Follow-On Public Offer

An FPO has certain distinct characteristics that differentiate it from other methods of raising capital:

• Issued by a listed company: An Follow-On Public Offer can only be made by a company that is already listed on a recognised stock exchange. This ensures that the company has already complied with initial listing requirements.
• Subsequent public offering: It takes place after the IPO and is not the first issue of shares by the company. It is an additional round of public fundraising.
• May involve fresh or existing shares: The company may issue new shares (increasing share capital) or existing shareholders may sell their shares to the public.
• Market-linked pricing: The pricing of shares in an FPO is usually influenced by the prevailing market price, unlike IPOs where pricing is determined before listing.
• Lower regulatory burden than IPO: Since the company is already listed, certain compliance requirements are comparatively reduced, although SEBI regulations still apply.

Types of Follow-On Public Offer

Follow-On Public Offers are broadly classified into different types based on how the shares are issued and their impact on the company’s capital structure.

Dilutive FPO

A dilutive FPO occurs when the company issues fresh shares to the public. In this case, the total number of outstanding shares increases.

This leads to dilution of existing shareholders’ ownership, as their percentage holding in the company decreases. It may also reduce the Earnings Per Share (EPS), since profits are now distributed over a larger number of shares.

The funds raised through a dilutive FPO go directly to the company and are typically used for expansion, new projects, or repayment of debt. For instance, companies like ITI Limited have attempted dilutive FPOs to increase public shareholding and raise capital.

Non-Dilutive FPO

A non-dilutive FPO involves the sale of existing shares by promoters or major shareholders to the public. In this case, no new shares are created.

Since the total number of shares remains the same, there is no dilution of ownership or impact on EPS. However, the ownership pattern of the company changes, as shares move from existing shareholders to new investors.

The proceeds from a non-dilutive Follow-On Public Offer go to the selling shareholders and not to the company itself. This type of Follow-On Public Offer is often used to reduce promoter shareholding or increase public participation.

At-the-Market FPO

An at-the-market FPO involves issuing shares at the prevailing market price. Instead of fixing a price band in advance, shares are offered directly through the secondary market.

This method provides flexibility to the company, as it can issue shares gradually and may even withdraw the offering if market conditions become unfavourable. It is also referred to as a controlled equity distribution.

How Does a Follow-On Public Offer Work?

The process of an Follow-On Public Offer follows a structured sequence of steps, ensuring transparency and regulatory compliance.

Appointment of Intermediaries

The company appoints intermediaries such as investment banks, merchant bankers, and underwriters. These entities assist in structuring the offer, managing regulatory compliance, and facilitating the issue.

Preparation of Offer Document

The company prepares a detailed offer document containing information about the issue, including the number of shares, price band, objectives of the issue, and financial details. This document is submitted to the Securities and Exchange Board of India (SEBI) for approval, usually in the form of a Draft Red Herring Prospectus (DRHP).

Pricing of the Issue

After obtaining regulatory approval, the company determines the price or price band for the shares. The pricing is generally influenced by the current market value of the company’s shares.

Opening and Closing of the Issue

The Follow-On Public Offer is opened for a specific period during which investors can apply for shares. Applications can be made through brokers or through the ASBA (Application Supported by Blocked Amount) mechanism.

Allotment of Shares

After the issue closes, shares are allotted to investors based on demand. If the issue is oversubscribed, allotment is made on a proportionate basis.

Listing and Trading

Once allotted, the shares are credited to investors’ demat accounts and are listed on the stock exchange. These shares can then be traded like any other listed shares.

Regulatory Framework Governing Follow-On Public Offer in India

FPOs in India are regulated by the Securities and Exchange Board of India (SEBI). The regulatory framework ensures fairness, transparency, and protection of investor interests.

Companies are required to file a Draft Red Herring Prospectus (DRHP) with SEBI, providing complete details about the issue. After approval, a Red Herring Prospectus (RHP) is issued, which serves as the final offer document.

SEBI guidelines also regulate aspects such as pricing, disclosure requirements, allotment procedures, and investor protection mechanisms. Even though Follow-On Public Offers involve already listed companies, compliance with these regulations remains essential.

Why Do Companies Opt for an Follow-On Public Offer?

Companies use FPOs as a strategic tool to meet various financial and operational objectives.

• Raising additional capital: One of the primary reasons is to raise funds for expansion, acquisition, or new projects. This enables companies to grow without relying heavily on debt.
• Debt reduction: Companies may use funds raised through Follow-On Public Offers to repay existing loans, thereby improving their financial stability and reducing interest burden.
• Improving liquidity: By increasing the number of shares in the market, Follow-On Public Offers enhance liquidity and make trading easier.
• Diversifying shareholding: Non-dilutive Follow-On Public Offers help in reducing promoter holding and increasing public participation, which can improve corporate governance.
• Strengthening financial position: Additional capital helps in improving balance sheets and building investor confidence.

Advantages of Follow-On Public Offer

Follow-On Public Offers provide several benefits for both companies and investors.

• Access to capital: Companies can raise significant funds without taking on additional debt obligations, which is beneficial for long-term growth.
• Lower risk for investors: Since the company is already listed, investors can analyse its past performance, financial statements, and market trends before investing.
• Price advantage: Follow-On Public Offer shares are often priced lower than the prevailing market price, making them attractive to investors.
• Increased market liquidity: Additional shares in circulation improve trading volumes and reduce price volatility.
• Enhanced investor confidence: A well-planned FPO signals financial strength and growth prospects, which can attract more investors.

Limitations and Risks of Follow-On Public Offer

Despite its advantages, FPOs also have certain drawbacks that must be considered.

• Dilution of ownership: In dilutive FPOs, existing shareholders experience a reduction in their ownership percentage.
• Reduction in EPS: Increasing the number of shares may lead to a decrease in Earnings Per Share, which can impact investor perception.
• Market reaction: If investors perceive the Follow-On Public Offer negatively, the share price may decline.
• Overuse of Follow-On Public Offers: Frequent issuance of shares can lead to erosion of shareholder value and loss of investor confidence.

How to Apply for an Follow-On Public Offer

The process of applying for an FPO is relatively straightforward.

An investor must first have an active demat account, as shares are credited electronically. The offer details can be studied through the prospectus, which contains information about the company’s financial position and purpose of the issue.

Applications can be made online through the ASBA facility, where the application amount is blocked in the bank account until allotment. Alternatively, physical forms may be submitted through authorised intermediaries.

After the issue closes, shares are allotted based on demand and credited to the investor’s account. These shares can then be traded on the stock exchange.

Follow-On Public Offer vs IPO: Key Differences

Follow-On Public Offer vs Listed Shares

An important question arises as to why investors would choose an Follow-On Public Offer when shares of the company are already available in the market.

The primary reason lies in pricing. Shares offered through an Follow-On Public Offer are often available at a price lower than the prevailing market price. This provides an opportunity for investors to acquire shares at a relatively favourable valuation.

Examples of Follow-On Public Offer in India

Several companies in India have used FPOs to raise additional capital. Examples include Power Finance Corporation (PFC), Tata Steel Limited, Power Grid Corporation of India, and ITI Limited.

These examples demonstrate how companies utilise Follow-On Public Offers to meet financial requirements after their initial public listing. However, not all Follow-On Public Offers are successful, as market conditions and investor sentiment play a crucial role.

Conclusion

A Follow-On Public Offer is an important financial instrument that allows already listed companies to raise additional capital from the public. It serves as a continuation of the company’s interaction with the capital market after its IPO.

While FPOs offer several advantages such as access to funds, lower risk for investors, and improved liquidity, they also carry certain risks, particularly in terms of dilution of ownership and potential impact on share value.

Therefore, Follow-On Public Offers must be used carefully as a strategic financial tool. When executed effectively, they can support business growth, strengthen financial stability, and enhance investor participation in the capital market.