Follow-on Public Offer

A Follow-on Public Offer (FPO) refers to the process by which an already listed company issues new shares to investors after its initial public offering (IPO). It is a common method for companies to raise additional capital from the public market for various corporate purposes, such as debt repayment, expansion, or working capital needs. FPOs play a crucial role in the secondary market by allowing existing shareholders to adjust their holdings and providing opportunities for new investors to participate in the company’s equity.

Definition and Purpose

A Follow-on Public Offer is an issuance of additional shares by a company that is already listed on a stock exchange. The primary goal of an FPO is to raise supplementary funds after the IPO phase. It differs from an IPO, which introduces a company to the market for the first time. The proceeds from an FPO may be used to finance projects, reduce existing debt, or meet general corporate expenses.
Key purposes include:

• Strengthening the company’s capital base.
• Funding expansion or diversification plans.
• Improving debt-equity ratio through debt repayment.
• Facilitating promoter share dilution to comply with regulatory norms.

Types of Follow-on Public Offers

FPOs are generally categorised into two main types depending on the nature of the issue and the purpose of fund utilisation.

1. Dilutive FPO
   • In a dilutive FPO, the company issues new shares to the public.
   • This increases the total number of outstanding shares, thereby diluting the ownership percentage of existing shareholders.
   • Funds raised from the sale of these shares go to the company’s account and are used for its business operations or growth.
   • For example, if a company issues new shares to raise money for infrastructure expansion, it is conducting a dilutive FPO.
2. Non-dilutive FPO
   • In a non-dilutive FPO, existing shareholders (such as promoters or large institutional investors) sell a portion of their holdings to the public.
   • This does not lead to an increase in the total number of shares but simply transfers ownership.
   • The proceeds go to the selling shareholders rather than the company.
   • It is often used to improve liquidity and increase the stock’s free float in the market.

Process and Regulatory Framework

The process of conducting an FPO is regulated by the securities market regulator, such as the Securities and Exchange Board of India (SEBI) in India. Companies must comply with listing requirements, disclosure norms, and eligibility conditions before making a public issue.
The typical FPO process involves:

1. Board Approval – The company’s board of directors approves the decision to raise funds through an FPO.
2. Appointment of Intermediaries – Merchant bankers, legal advisors, and auditors are appointed to manage the issue.
3. Preparation of Draft Prospectus – A draft offer document containing financial details, objectives of the issue, and risk factors is filed with the regulator.
4. Regulatory Review and Approval – The regulator reviews the offer document and may seek clarifications or amendments.
5. Pricing and Allotment – The issue price can be fixed or determined through the book-building process, wherein bids are invited from investors.
6. Subscription and Listing – Once the issue is subscribed, shares are allotted, and the newly issued or transferred shares are listed on the exchange.

Advantages of Follow-on Public Offers

FPOs offer a range of benefits for both the issuing company and investors:
For the Company:

• Access to additional capital without incurring debt.
• Improved market visibility and investor confidence.
• Opportunity to comply with minimum public shareholding norms.
• Enhanced financial flexibility for future projects.

For Investors:

• Opportunity to invest in an established, already-listed company with known performance metrics.
• Potential for discounted pricing in certain FPOs compared to market price.
• Liquidity benefits due to the increased availability of shares in the market.

Risks and Challenges

Despite the advantages, FPOs come with certain limitations and potential risks:

• Share Dilution: In a dilutive FPO, the value of existing shareholders’ holdings may decrease due to the increase in outstanding shares.
• Market Reaction: If investors perceive the issue as a sign of financial distress, the stock price may decline.
• Pricing Pressure: Incorrect pricing of shares can lead to undersubscription or poor post-listing performance.
• Regulatory Complexity: The process involves stringent disclosure and compliance requirements, increasing the cost and time involved.

Examples and Global Perspective

FPOs are widely used across global markets. For instance, companies such as State Bank of India (SBI) and Oil and Natural Gas Corporation (ONGC) have used FPOs to raise substantial funds in India. Internationally, large corporations like Facebook and Tesla have conducted follow-on offerings to strengthen their balance sheets and finance expansion.
The FPO market often reflects broader economic and investor sentiment. During bullish market conditions, FPOs tend to attract strong participation as investors are optimistic about growth prospects. Conversely, in volatile or bearish phases, companies may defer their FPO plans to avoid poor response.

FPOs in Comparison with Other Fundraising Methods

FPOs differ from other equity fundraising instruments in several ways:

• Rights Issue: In a rights issue, shares are offered only to existing shareholders, whereas an FPO is open to the general public.
• Qualified Institutional Placement (QIP): QIPs target institutional investors exclusively, while FPOs are open to both retail and institutional investors.
• Private Placement: Private placements involve selective investors, whereas FPOs are conducted through a public process with higher transparency.

Recent Trends and Market Developments

In recent years, regulatory authorities have streamlined FPO procedures to encourage more companies to raise capital through public offerings. With the increasing participation of retail investors and the growing influence of digital platforms in stock market trading, FPOs have gained renewed relevance.
Moreover, the introduction of fast-track FPO routes for companies with strong compliance records has reduced approval times and administrative burdens. These reforms have made FPOs a preferred choice for companies looking to mobilise funds efficiently while maintaining transparency and market credibility.
The trend also shows a strategic shift towards book-built FPOs, where demand-based pricing helps in discovering fair value and reducing market volatility. Companies in sectors such as banking, energy, and technology have been particularly active in using FPOs as part of their capital-raising strategy.