Follow-on Public Offering (FPO)

A Follow-on Public Offering (FPO) is a process through which a company that is already listed on a stock exchange issues additional shares to the public to raise further capital. It is an important instrument in the capital market that allows companies to mobilise funds after their initial public offering. In the Indian financial system, FPOs contribute significantly to capital formation, market liquidity, and efficient allocation of financial resources.
From the perspective of banking, finance, and the Indian economy, Follow-on Public Offerings support corporate expansion, strengthen balance sheets, and enhance the depth and stability of equity markets.

Concept and Meaning of Follow-on Public Offering

A Follow-on Public Offering refers to the issuance of equity shares by a listed company to investors through the public route. Unlike an Initial Public Offering, which introduces a company to the stock market, an FPO is undertaken after listing and trading have already begun.
The shares offered in an FPO may be newly issued shares, which increase the total share capital of the company, or existing shares offered for sale by promoters or major shareholders. Pricing may be carried out through a fixed price method or a book-building process, depending on regulatory norms and market conditions.

Distinction between IPO and FPO

Although both IPOs and FPOs involve public issuance of shares, they differ in several important aspects.

• An IPO is the first public issue by an unlisted company, while an FPO is undertaken by a listed company.
• IPOs focus on market entry, whereas FPOs focus on raising additional capital.
• Pricing of IPOs is based largely on growth expectations, while FPO pricing is influenced by prevailing market prices.
• FPOs involve lower information asymmetry as the company already has a performance and trading history.

These differences make FPOs relatively more predictable for investors.

Regulatory Framework in India

Follow-on Public Offerings in India are regulated by the Securities and Exchange Board of India. SEBI prescribes comprehensive rules regarding eligibility, disclosures, pricing, allotment, and investor protection.
Companies issuing FPOs must also comply with listing regulations of recognised stock exchanges and ensure timely and accurate disclosure of financial and operational information. This regulatory framework promotes transparency, fairness, and investor confidence in the capital market.

Types of Follow-on Public Offerings

FPOs in the Indian capital market can be classified into two broad categories.

• Dilutive FPOs, where the company issues new shares, increasing the total number of outstanding shares and diluting existing ownership.
• Non-dilutive FPOs, where existing shareholders, such as promoters or government entities, sell part of their holdings without increasing total share capital.

Each type serves distinct objectives, including fund mobilisation, compliance with public shareholding norms, or government disinvestment.

Role of FPOs in Corporate Finance

In corporate finance, Follow-on Public Offerings are an important source of long-term equity capital. Companies utilise FPO proceeds for business expansion, modernisation, debt repayment, mergers and acquisitions, or meeting regulatory requirements.
For banks and financial institutions, FPOs are particularly important as they help strengthen capital adequacy ratios. A stronger equity base enables banks to expand credit while maintaining financial stability.

Importance for Banking and the Financial System

From a banking perspective, FPOs improve the financial strength of borrowing firms, reducing credit risk and enhancing repayment capacity. Well-capitalised companies are better positioned to withstand economic shocks and maintain steady operations.
For the broader financial system, FPOs increase the supply of equity instruments, enhance liquidity, and support efficient price discovery. They also encourage greater participation by institutional and retail investors, deepening the capital market.

Impact on Investors and Capital Markets

FPOs provide investors with opportunities to invest in established companies with known financial performance, governance standards, and market reputation. The availability of historical data allows more informed investment decisions compared to new public issues.
In capital markets, FPOs ensure a continuous flow of securities, supporting market activity and liquidity. They also contribute to long-term savings mobilisation by offering credible investment avenues.

Advantages of Follow-on Public Offerings

Follow-on Public Offerings offer several advantages in the Indian financial context.

• Enable companies to raise additional equity capital at market-linked prices.
• Improve liquidity and public shareholding of listed companies.
• Strengthen balance sheets and reduce dependence on debt.
• Provide investors access to established firms.
• Support government disinvestment and capital market development.

These advantages make FPOs an effective and widely used capital-raising mechanism.

Limitations and Challenges

Despite their benefits, FPOs face certain limitations.

• Issuance of new shares may dilute existing shareholders’ ownership.
• Adverse market conditions can affect pricing and subscription levels.
• Investor sentiment plays a crucial role in the success of an FPO.
• Regulatory compliance and disclosure requirements may increase costs.