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Do you follow the Indian stock market closely? Then probably you might have come across terms such as IPO quite often. An Initial Public Offering (IPO) grabs the headlines whenever a new startup decides to go public.
However, companies often need more capital long after their initial stock market debut. This is where a Follow-on Public Offering comes into the picture. For a retail investor looking to build a balanced portfolio in the Indian share market, it is essential to understand what FPO is and how it functions.
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Key Takeaways
- Already listed – A Follow-on Public Offering (FPO) is when a company already listed on the stock exchange issues new shares to existing shareholders or the general public.
- Currently trading – Unlike an Initial Public Offering (IPO), an FPO happens after the company’s shares are already trading in the stock market.
- Objectives – Companies use FPOs primarily to raise extra capital, clear existing debt, or reduce promoter holding to meet regulatory rules.
- Two types – Investors can choose between two main types of FPOs: Dilutive and Non-Dilutive.
- Less risky – FPOs are generally considered less risky than IPOs because investors already have historical data, financial track records, and stock performance to evaluate.
What is FPO?
1: What is a stock?
To answer what is FPO simply: an FPO, Follow-on Public Offering in full form, is a process where an already listed public company issues additional shares to the market.
Whenever a company wants to raise capital for the first time from the general public, it launches an IPO. On the completion of the IPO, the company’s shares start trading on major stock exchanges like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE).
However, post the IPO, growth does not come to an end. Several years down the line, the company might decide it needs more funds. It may be for expanding its operations, building new factories, or paying off pending loans. Instead of opting for a high-interest bank loan, the company can choose to issue more shares to the public. This secondary issuance of stock by a listed entity is known as an FPO.
Why do Companies Issue an FPO?
Raising equity capital is one of the most effective ways for a business to fund its future goals. Here are the primary reasons why listed Indian companies opt for an FPO:
1. Business Expansion and Growth
Companies are constantly in search of opportunities to scale. The reasons may vary starting from setting up new manufacturing plants, entering overseas markets, or investing heavily in research and development.
An example is Vodafone Idea FPO launched in 2024 April. The company’s plan was to utilize the proceeds of this FPO for expanding its network infrastructure by establishing new 4G sites, capacity expansion of existing 4G sites and setting up new 5G sites.
From the FPO, Vodafone Idea raised Rs.18,000 crore, the largest by an Indian company at that point of time. An FPO provides a large pool of capital without adding a debt burden to the balance sheet.
2. Debt Reduction
High corporate debt can eat away at a company’s profit margins through massive interest payments. Many Indian businesses use the funds raised through an FPO to clear their outstanding loans. Investors and credit rating agencies often find a debt-free or low-debt company more attractive.
Reeling under a debt of Rs.12,000, Ruchi Soya launched a Rs 4,300 crore follow-on public offer (FPO) in 2022 March. The objective was to reduce debt and to dilute the promoter’s stake in order to be in line with the market regulator’s norms.
3. Compliance with SEBI Regulations
In the case of listed companies, the Securities and Exchange Board of India (SEBI) mandates minimum public shareholding rules. As per these guidelines, promoters must maintain a minimum percentage of public float (usually 25%).
If a promoter holds too much stake, the company may issue an FPO to dilute the promoter’s holding and meet SEBI’s compliance standards. Yes Bank launched a Follow-on Public Offer (FPO) in 2020 July. The purpose was to raise Rs 15,000 crore to boost its capital levels in compliance with regulatory norms.
4. Strategic Acquisitions
Whenever a business wants to acquire a competitor or merge with another firm, it needs a good amount of liquidity. In such situations, an FPO allows the company to raise the cash required for strategic mergers and acquisitions quickly.
Types of FPOs
Not all FPOs are created equal. When asking what an FPO is and how it impacts your holdings, you must understand the two primary types: Dilutive FPOs and Non-Dilutive FPOs.
| Types of FPOs | |
| Dilutive FPO | Non-Dilutive FPO |
| New shares created | Existing shares resold |
| Total pool expands | Total pool remains same |
| EPS decreases | EPS stays stable |
Dilutive FPO
In a dilutive FPO, the company’s board approves the creation and issuance of brand-new shares. Since new shares are added to the market, the total number of outstanding shares increases.
Because the total pool of shares expands while the company’s overall earnings remain the same in the short term, the Earnings Per Share (EPS) drops. This reduction is known as share dilution. Existing shareholders will hold a slightly smaller percentage of the overall company unless they purchase additional shares in the offer.
Non-Dilutive FPO
In a non-dilutive FPO, no new shares are created. Instead, existing holders of large blocks of shares—such as company founders, promoters, or private equity investors—sell their holding directly to the public.
Since no new shares enter the market, the total number of outstanding shares remains unchanged. As a result, the company’s Earnings Per Share (EPS) is not diluted. This is also commonly referred to as an Offer for Sale (OFS).
How does an FPO Work? The Process Step-by-Step
Launching an FPO requires strict adherence to corporate governance and regulatory checks. Here is a simplified look at how an FPO moves from board approval to final share allotment:
1st Step: Board Approval
The company’s board of directors meets to discuss funding requirements. If they decide an FPO is the best route, they pass a board resolution and seek approval from existing shareholders.
2nd Step: Appointing Merchant Bankers
The company hires merchant bankers, investment banks, and legal advisors to manage the entire process. Merchant bankers help determine the issue price, draft the offer document, and handle regulatory approvals.
3rd Step: Filing the Draft Red Herring Prospectus (DRHP)
The company files a DRHP with SEBI. This prospectus contains comprehensive financial reports, the purpose of the issue, risks involved, and promoter background. SEBI reviews the document to ensure full transparency for retail investors.
4th Step: Marketing and Pricing
The company promotes the issue through roadshows and investor meets. FPOs can be offered in two ways:
- Fixed Price Issue: The company sets a fixed price per share.
- Book Building Issue: The company provides a price band (e.g., ₹200 to ₹215), and investors bid within that range.
5th Step: Bidding and Allotment
The FPO opens for subscription over a set window, usually 3 to 5 trading days. Retail investors apply using ASBA (Application Supported by Blocked Amount) through their bank or broker. Once bidding closes, shares are allotted, and refunded amounts (if unallotted) are unblocked in bank accounts.
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Know moreIPO vs. FPO: Key Differences
Understanding what FPO is becomes much clearer when you contrast it with an IPO.
| Parameter | IPO (Initial Public Offering) | FPO (Follow-on Public Offering) |
| Company Stage | Unlisted company going public for the first time. | Already listed public company. |
| Risk Level | Higher risk due to limited public track record. | Lower risk as historical data is available. |
| Purpose | To list on stock exchanges and raise initial equity. | To raise additional funds or reduce promoter stake. |
| Pricing | Often harder to value due to lack of market history. | Priced typically at a discount to current market price. |
| Information | Limited to historical financials in prospectus. | Extensive public record, quarterly reports, and trading trends. |
Top Advantages and Risks of Investing in an FPO
Before you invest your hard-earned money, it is an imperative to compare the potential rewards against the risks involved.
Advantages of FPOs
- Discounted Pricing: In order to attract investors, companies often price their FPO shares at a slight discount compared to the prevailing market price on the stock exchange.
- Proven Track Record: When compared to an IPO where you rely heavily on projections, an FPO offers years of published financial statements, quarterly earnings, and dividend histories.
- Higher Transparency: Listed companies are subject to rigorous SEBI regulations. This makes operational information easily accessible to retail investors.
Risks of FPOs
- Market Volatility: As stock prices fluctuate daily, if the overall market crashes during the FPO window, the share price might drop below the FPO issue price.
- Share Dilution: Dilutive FPOs increase total shares, which can temporarily push down the stock’s Earnings Per Share (EPS) and market price.
- Reason for Raising Capital: If a company issues an FPO simply to service bad debt with no clear plan for profitable growth, it could be a sign of underlying operational weakness.
How to Apply for an FPO in India
Applying for an FPO in India is straightforward and follows a process very similar to applying for an IPO:
- Active Demat Account: Make sure that you have an active Demat and Trading account with a registered Indian broker.
- Access IPO/FPO Section: Log in to your broker’s app or web portal and go to the “Bids”, “IPO”, or “FPO” section.
- Select the Issue: Choose the active FPO you want to apply for from the list.
- Enter Bid Details: Select the quantity (in lots) and specify your bid price (or select the Cut-Off price).
- UPI Authorization: Key in your UPI ID and submit the application. Open your UPI app to approve the funds mandate.
- Confirmation: Once approved, the funds will be blocked in your bank account until the allotment process is completed.
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Should You Invest in an FPO?
An FPO can present a great opportunity to buy shares of a well-established business. That too at a prospective discount. However, a discount alone should never be the only criteria to invest.
Before placing your bid, check the reasons why the business needs additional cash. Find out whether the capital is meant for launching new products, expanding infrastructure, or paying off long-term debts. If it boils down to healthy growth, it may be worth considering that FPO.
On the other hand, if the funds are being used to cover recurring operational losses, it is better to exercise caution. Always review the company’s balance sheet, read the prospectus, and consult a qualified financial advisor before allocating capital.
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Know moreFrequently Asked Questions
What is FPO in the stock market?
An FPO is an offering where an already listed public company issues additional fresh shares or existing promoter shares to the public to raise funds.
Is an FPO safer than an IPO?
FPOs are generally considered less riskier than IPOs as listed companies have a publicly available track record, financial reports, and market trading history.
Why are FPOs offered at a discount?
Companies often offer FPO shares at a lower price than the current market value to attract retail investors and ensure full subscription of the issue.
What happens to the share price after an FPO?
If it is a dilutive FPO, increased share supply may cause a temporary drop in share price. However, strong business growth can boost prices long-term.
Can existing shareholders apply for an FPO?
Yes, existing shareholders as well as new retail investors can apply for shares in an FPO via their Demat account using the ASBA facility.
What is the difference between dilutive and non-dilutive FPOs?
Dilutive FPOs create new shares, increasing total supply and lowering EPS. Non-Dilutive FPOs involve existing holders selling their shares without adding new stock.
How long does the FPO subscription remain open?
In India, an FPO subscription window typically remains open for 3 to 5 working days for investors to submit their bids.
