In this post, we will discuss Follow on Public Offer or FPO. But, to understand the concept better, you need to know about IPO or Initial Public Offering first.
To recap IPO or Initial Public Offering is a process through which a private company raises capital from the public for the first time to meet its capital requirements. Thus, it becomes a public company after that. Further, the company has to list its shares in stock exchanges.
However, the game does not end here. For example, the company may need further capital to expand its business, clear off its debts, launch new products or services, or meet its working capital needs. Thus, the same story comes again.
But, the company cannot bring another IPO as it is a one-time event. Then, how does a company meet its further capital requirements?
The answer is Follow on Public Offer or Further Public Offer. However, this is not the only option, but it is one of the options. But, we will restrict our discussion to FPO only in this session. Let’s start.
What is Follow on Public offer or FPO?
Private companies raise capital from the public and become public companies. Further, they have to list their shares in stock exchanges so that investors can buy and sell their shares smoothly. However, that is not the end of the road. They require capital as human beings need food and water. However, there are specific provisions set by SEBI to raise further money. One such option is Follow on Public Offer or FPO.
As the name suggests, it is a process where companies raise capital for the next time after IPO. Further, there are no restrictions on the number of FPOs a company can bring. Thus, companies can bring FPOs multiple times.
However, the FPO process is the same as the IPO. Thus, the company has to hire merchant bankers, underwriters, and other entities similar to an IPO. And, it happens in the primary market only.
Further, companies have to submit Draft Red Herring Prospectus or DRHP to SEBI, announce FPO timetable after approval, receive bids from investors, allot shares according to their respective quotas, etc. Thus, the process is similar to IPO.
Types of Follow on Offer or FPO
FPOs can be of two types. They are as follows.
Dilutive Follow on public offer.
In a dilutive FPO, a company issue new shares. Thus, it dilutes the outstanding shares. In other words, the total number of outstanding shares of the company increases. Let’s see an example.
For example, Yes Bank, an Indian private bank, wanted to raise Rs 15,000 Crores by issuing new 1,250-crore shares at a floor price of Rs 12 through FPO. As you can observe, the process is similar to an IPO.
Thus, after the FPO, the total outstanding shares of Yes Bank has increased to 2505.49 Crore. I present the total outstanding shares of Yes Bank to you over the last five years for a comparative study.
|Year||Number of Outstanding Shares (In Crores)|
As you can observe, it kept issuing more shares each year. It is a red flag. It dilutes your ownership in the bank. We will discuss it more in our subsequent sessions.
Non-dilutive follow on public offer.
In a non-dilutive FPO, a company does not issue new shares. The promotors, directors, or other prominent shareholders are willing to sell their shares to the public through the FPO. Therefore, a non-dilutive FPO does not dilute your ownership in a company, as observed in the above example. Further, the total outstanding shares of the company remain constant.
But why do promotors or other prominent investors sell their shares to the public?
There may be several reasons, but the following two reasons are quite common.
1. To comply with SEBI guidelines on Minimum Public Shareholding (MPS)
As per SEBI’s guideline, the minimum public shareholding in a public company should be 25%. However, the promotors of some companies have more than 75% shareholding. Thus, they have to sell their shares to the public through non-dilutive FPO. Mostly, they are PSUs (Public Sector Undertakings) or CPSEs (Central Public Sector Enterprises), where the president of India is the promoter. Here is a sample list for your reference.
|Name of the company||Promotor Shareholding (In %)|
|Bank of Maharashtra Ltd||92.49|
|Bharat Dynamics Ltd||87.75|
|General Insurance Corporation of India Ltd||85.78|
|IRCTC (Indian Railway Catering & Tourism Corporation Ltd)||87.40|
|ITDC (Indian Tourism & Development Corporation Ltd)||87.03|
It is not the complete list. There are dozens of such companies, and they have to bring OFS or FPO to comply with SEBI guidelines.
2. The Government’s Disinvestment Plan
The Government of India holds a majority stake in PSUs and CPSEs. It sells its stake to public, strategic investors or other public companies to raise capital, which is called disinvestment.
But why does the Government need capital?
The Government needs capital to promote its social programs, increase consumption and demand, minimize its debt, finance large-scale infrastructure projects, reduce the fiscal deficit, etc.
Note: Fiscal deficit is the gap between the income and expenditure of the Government.
For example, in the year 2014, the Government of India had sold 33,693,660 Equity Shares of Engineers India Ltd to raise around Rs 500 Crores through FPO. Further, it was a part of the disinvestment process by the Government. For your kind information, Engineers India Ltd is a leading Engineering Consultancy Navaratna Company.
Here is a screenshot of the FPO for your reference.
As you can observe, it was just like an IPO process. It has mentioned the FPO dates, the number of shares to be sold, amount to be raised, FPO price band, and the minimum number of shares one can apply, etc.
However, today most of the disinvestment process is done through IPO, OFS, ETF routes. But why does someone prefer to buy shares of a public company already listed in the stock exchange?
The main reason is pricing.
Pricing in FPO?
Suppose there is a company that trades at Rs 100 per share in stock exchanges. Now, the company brings FPO at Rs 110 per share. What would you do? Will you apply for the FPO?
There is no reason to apply as the shares are already available at Rs 100 per share. You can buy it anytime. The company also knows it. Thus, it brings FPO at a lower price than its current market price. Further, in most cases, retail investors also get discounts at FPOs brought by the Government of India. Thus, it becomes an attractive deal, particularly for retail investors.
Three things happen here.
- The share price of the company goes down once the news about the FPO comes
- Then, the company launches FPO below its market price
- There may be a discount to retail investors also
For example, suppose the shares of ABC company are trading at Rs 100 per share in the secondary market. Once investors and traders smell that the company is bringing its FPO, they try to sell it to buy at a lower price. It causes supply pressure, and thus the share price goes down. Suppose it went to Rs 90 in this case.
Then, the company has to bring FPO below Rs 90. Suppose, it decided the FPO price at Rs 85 per share. Further, if it is a PSU, then in most cases, the Government of India may offer another discount to retail investors. Suppose the discount is 5%. Then retail investors have to pay Rs 80.75, which is a 5% discount to Rs 85.
Thus, if you calculate precisely, it is a 19.25% discount in total to retail investors.
Hence, it can be an opportunity for retail investors to enter the FPO either for trading or investing.
IPO Vs. FPO
Let’s understand both these terms with the help of a table.
|Only One time||Yes||No|
|Chances of Risk||High||Low|
|Chances of Listing Gain||High||Low|
|Demand for Shares||High||Low|
|Availability of Previous Track Record||No||Yes|
|Types of Issue||Fresh Issue or OFS||Dilutive or Non-dilutive|
The primary purpose of both IPO and FPO is to raise capital. However, there are a few differences between the two. Let’s understand it.
A private company brings IPO to raise capital from the public for the first time and becomes a public company. On the other hand, a public company cannot bring another IPO and thus bring FPO to raise capital.
A company can bring IPO only once in its lifetime. However, it can offer FPO multiple times.
There is an inherent risk with IPOs as data, and the company’s previous track record etc. is not available. However, it is not valid with the companies that bring FPO. They are public companies, and thus we get sufficient data and have a previous track record.
People are generally obsessed with IPOs and want to grab a piece of cake. Thus, it is a much exciting product, and so the chances of listing gain are also high. However, only a few FPOs get oversubscription and so the chances of listing benefit is not high.
Note: People invest in an IPO or FPO and sell it on the day it gets listed on stock exchanges to make some profit. It is called listing gain.
An IPO can come as a Fresh Issue (new shares are created) or an OFS (the promoters or other existing big investors may sell their shares to the public). On the other hand, an FPO can be dilutive (new shares are created) or non-dilutive (existing big investors sell their shares, including promoters).
These are some of the significant differences between an IPO or Initial Public Offer and FPO or Follow on Public Offer.
Closing Thought on FPO
Once the FPO is complete, the number of floating shares increases. It happens in both dilutive and non-dilutive FPOs. For example, in dilutive FPOs, new shares are created, increasing the number of floating shares. Similarly, in non-dilutive FPOs, the shares are transferred from promotors or big investors to the public. Thus, in either case, the number of floating shares increases.
Note: Floating shares are the number of shares available for trading.
Then, speculative trading occurs there. In other words, people buy and sell the shares of the company depending on its price action. Therefore, the shares of the company generally remain flat for a long time.
What should an investor do?
Retail investors should exit their positions once they hear about the FPO and only take an entry at the discounted price to book profit. Once they book profit, they should wait and watch till they get a clear direction of the share movement, and re-enter only if the fundamentals of the company have not changed.
You might have encountered a few jargon in the last two or three episodes. It is common, as every field has its own set of new words. However, with time, you will get acquainted with these terms. It needs time and continuity. Thus, I would request to stay with me, and I am sure personal finance will not be an alien subject for you.
Thanks and regards,
Disclaimer: I am not a SEBI registered financial advisor. Thus, all the views and opinions expressed by me in the posts are from my research and experience. Further, the posts are intended for educational purposes only.