What is FPO in Share Market?: Meaning, Types, Advantages and More

Do you know what has brought the attention of many eyes to FPO in the share market?

The answer lies in its ability to offer a significant raise in equity and reduction of debt. The FPO is usually offered by the companies as a secondary offering for specific reasons, including increasing equity and decreasing debt. In this blog let’s understand what is FPO in the share market, how the investors benefit from it, and the steps that are required to launch a successful FPO.

What is FPO in Share Market?

The full form of FPO in the stock market is Follow-on Public Offer. It is the process in which the companies offer a secondary additional share to their investors. The main purpose of FPO is to capitalize the money for the companies. The process is generally launched to attract an ample number of investors and put the price at discount rates. The companies offer FPO if they require funds for a new project or want to pay off some pending debts.

If a company launches FPO, then it indicates that they are expanding their growth and operations which becomes a plus point for the investors to invest in the existing shares for their benefits. To gather extensive knowledge of FPO meaning in the share market and gain expertise in this field you can enroll in the online stock market course.

Functions of FPO (Follow-on Public Offer)

The FPO functions on an intrusive process, here are the points that explain its working:

• Proposal: The company proposes the announcement of coming up with FPO and states the offer and price range that is to be offered.
• Approval: After the proposal, the company requires approval for the launch of FPO by SEBI.
• Booking: Once the request is approved, the companies book a building, where the bids are invited and the final price is fixed.
• Allotment: The allotment comes next in line after the process of bidding is complete, the company allots the shares to investors in this step.
• Share of Stocks: The next step lists the shares to the stock exchange and the companies receive the funds earned.
• Compliance: The final step involves post-issue compliance in which the company needs to comply with various types of regulations.

Also Read: What is Dividend in Share Market?

Types of FPO

Let’s understand the types of FPO in the share market in detail. There are mainly two major and one minor type of FPOs, and they are explained below:

Dilutive Follow-on Public Offering

The dilutive follow-on public offering works by diluting the ownership that the shareholders possess. The announcement of diluted FPO means that the shareholders of the company will now own less percentage of the company than they had because the FPO was offered. These FPOs are used by the companies to raise additional capital, to deal smoothly with the underlying debts, or to improve the structure of the company. The company can reduce the value of the existing shares in FPO depending on their financial position.

Non-Dilutive Follow-on Public Offering

The non-dilutive FPO works when the existing shareholders of the company sell their shares and no new offerings are proposed by the company. This method prevents the dilution of ownership that the investors own. The profit of the shares, however, goes directly to the investors instead of the company.

At-the-Market Follow-on Public Offering

This is a minor type of FPO that is not used widely and is also known as an ATM Follow-on Public Offering. In this ATM offering, the companies sell directly to the market and no traditional methods are used. The shares sold with this offering follow a gradual process and raise capital for the company as required. The companies choose agents and brokers to help them with the sale of these shares.

Utilization of FPO

To understand what is follow-on public offer (FPO) in the share market it is essential to understand how FPO is utilized in the share market.
Here’s how several companies have been utilizing FPO:

• The SBI Cards raised around Rs 10,000 crore through FPO in March 2020.
• Indian Railway Catering and Tourism Corporation raised about Rs 640 crores through FPO in February 2020.
• HDFC Asset Management Company Ltd raised about Rs 2500 crores with the help of an FPO in July 2018.
• Oil India Limited raised approximately Rs 3000 crores in September 2012.
• ICICI Prudential Life Insurance Company Ltd raised almost Rs 6000 crores through an FPO in September 2016.

Also Read: What is LTP in Share Market?

Advantages and Disadvantages of FPO

The following are the advantages and disadvantages of FPO:

Advantages

• If the company uses FPO, it gives investors more options to buy and sell.
• It also improves in raising the market money of the company.
• It improves the financial position of the company.
• It enhances the public image of the company.

Disadvantages

• When the company announces FPO, it dilutes the ownership of the existing shareholders.
• The company’s share price may decline if FPO is perceived to be negative.
• FPO requires significant regulatory compliance.
• The overvaluation of FPO may result in negative impacts on the company.

Conclusion

In this blog we discussed what is FPO in the share market and how it benefits the companies. The FPOs are offered by the companies as a secondary offering and for their specific benefits. They are completely optional and are dependent on the financial condition of the company.