Follow on Public Offering (FPO)

A Follow-On Public Offering (FPO) can be classified into two main types:

1️⃣ Dilutive FPO

🔹 The company issues new shares to the public, increasing the total number of outstanding shares.
🔹 This can lead to dilution of existing shareholders' ownership as the percentage of their stake decreases.
🔹 The funds raised go directly to the company for purposes such as expansion, debt repayment, or acquisitions.

Example: A company with 10 million shares issues 2 million new shares in an FPO. Existing shareholders now own a smaller percentage of the company than before.

2️⃣ Non-Dilutive FPO

🔹 In this type, existing shareholders (such as promoters or early investors) sell their shares to the public.
🔹 The total number of shares remains the same, so existing shareholders do not face dilution.
🔹 The company does not receive any funds—the money goes to the selling shareholders.

Example: A major investor in a company sells 5 million of their shares through an FPO. The ownership structure changes, but the company’s total outstanding shares remain unchanged.

Companies choose a Follow-On Public Offering (FPO) over other fundraising methods due to several strategic advantages:

1️⃣ Raising Capital Without Increasing Debt

• Unlike loans or bonds, an FPO does not create debt or interest obligations.
• It strengthens the company’s balance sheet and improves financial stability.

2️⃣ Expanding Business Operations

• Companies use FPO proceeds for business expansion, acquisitions, R&D, or entering new markets.
• It provides funding for long-term growth without relying on external borrowing.

3️⃣ Reducing Debt & Interest Costs

• Companies with high debt can use FPO funds to repay loans and reduce interest expenses.
• A lower debt burden improves profitability and credit ratings.

4️⃣ Enhancing Market Liquidity

• An FPO increases the number of publicly traded shares, improving stock liquidity.
• Higher liquidity attracts institutional investors and retail traders.

5️⃣ Offering Exit to Existing Investors (Non-Dilutive FPO)

• Promoters, private equity firms, or early investors can use an FPO to sell their stake and exit the company.
• This provides them with liquidity while allowing new investors to enter.

6️⃣ Favorable Market Conditions

• If the company’s stock price is performing well, it can issue shares at a premium, raising capital efficiently.
• Positive market sentiment makes it easier to attract investors.

7️⃣ Less Regulatory Burden Compared to an IPO

• Since the company is already publicly listed, the regulatory process is simpler than an Initial Public Offering (IPO).
• There is no need for extensive disclosures as in an IPO.

The issue price of a Follow-On Public Offering (FPO) is set based on market demand, company valuation, and investor interest. Companies typically use one of the following pricing methods:

1️⃣ Book-Building Method (Most Common)

• The company sets a price band (e.g., ₹300 - ₹350 per share).
• Investors place bids within this range.
• The final issue price is determined based on demand at different price levels.
• Higher demand at a certain price point sets the cut-off price, ensuring maximum capital is raised.

Example: If most bids are around ₹340, the issue price is likely set near this level.

2️⃣ Fixed-Price Method (Less Common)

• The company sets a fixed price before the FPO opens.
• Investors subscribe at this predetermined price.
• This method is simpler but riskier, as mispricing can lead to oversubscription or undersubscription.

Example: The company directly offers shares at ₹320 per share.

3️⃣ Discounted Pricing Strategy (Common for Retail Investors)

• To attract retail investors, companies may offer a discount (e.g., 5-10%) on the current market price.
• Ensures participation and demand from small investors.

Example: If the stock trades at ₹350, the FPO price may be ₹325 with a 7% discount.

📌 Key Factors Affecting FPO Pricing

✔ Market Demand & Investor Sentiment – Higher demand leads to a higher price.
✔ Company’s Financial Performance – Strong earnings and growth prospects attract investors at higher prices.
✔ Industry & Economic Conditions – A booming sector can support premium pricing.
✔ Stock’s Current Market Price – The FPO price is typically lower than the market price to attract buyers.

1️⃣ Board Approval & Announcement

The company’s Board of Directors approves the FPO and announces the decision to the stock exchanges. The announcement includes the purpose of fundraising, estimated size, and expected timeline.

2️⃣ Appointment of Investment Bankers & Legal Advisors

The company appoints investment banks (underwriters) to manage the offering. Legal and financial advisors help structure the FPO and prepare regulatory documents.

3️⃣ Filing of Draft Offer Document with SEBI (For India)

The company submits a Draft Red Herring Prospectus (DRHP) to SEBI (Securities and Exchange Board of India). SEBI reviews the document and may request modifications before granting approval.

4️⃣ Setting the Price Band & FPO Opening Date

The company, along with investment bankers, determines a price band (for book-building FPOs). The opening and closing dates of the FPO are announced publicly.

5️⃣ Subscription Period (Investor Bidding & Application Process)

Investors (retail, institutional, and high-net-worth individuals) place bids within the price range. Demand determines the final cut-off price in book-building FPOs.

6️⃣ Price Determination & Allotment Finalization

Based on demand, the final issue price is set. Shares are allocated to investors proportionally (if oversubscribed) or fully (if undersubscribed).

7️⃣ Refunds & Listing on Stock Exchange

Unsuccessful applicants receive refunds for unallotted shares. Newly issued shares are credited to demat accounts of investors. The stock is listed and begins trading on the stock exchange.

1️⃣ Impact on Share Price

✔ Short-Term Pressure: The announcement of an FPO can lead to a drop in share price, especially if investors perceive it as dilutive or if the FPO is priced at a discount.
✔ Market Perception: If the company is raising funds for growth and expansion, it may have a positive impact on investor sentiment.
✔ Post-FPO Volatility: Once the new shares are issued, the market may adjust based on demand, supply, and company performance.

2️⃣ Impact on Existing Shareholders

✔ Dilution of Ownership (In Dilutive FPOs): Issuing new shares reduces the percentage holding of existing shareholders, meaning their share in earnings and voting rights decreases.
✔ Stock Liquidity Increases: More shares in the market improve liquidity, making it easier to buy and sell the stock.
✔ Potential Long-Term Gains: If the FPO funds are used effectively (e.g., expansion, debt reduction), the stock price may rise over time, benefiting all shareholders.

An FPO (Follow-On Public Offering) is open to a wide range of investors, including:

1️⃣ Retail Investors

✔ Individual investors who invest up to ₹2 lakh (in India) in the FPO.
✔ Often receive a discounted price compared to institutional investors.
✔ Can apply through brokers, trading platforms, or banks.

2️⃣ Institutional Investors (Qualified Institutional Buyers - QIBs)

✔ Includes mutual funds, banks, insurance companies, pension funds, foreign institutional investors (FIIs), and alternative investment funds (AIFs).
✔ They typically get a larger share allocation and play a key role in price discovery.

3️⃣ High-Net-Worth Individuals (HNIs) & Non-Institutional Investors (NIIs)

✔ Investors who invest above ₹2 lakh in the FPO.
✔ Often apply for large allocations and participate through the non-institutional category.

4️⃣ Existing Shareholders & Promoters

✔ Existing shareholders may or may not get preferential allotment, depending on the FPO structure.
✔ Promoters can also participate if allowed under regulatory guidelines.

Investment banks and underwriters play a crucial role in the planning, execution, and success of a Follow-On Public Offering (FPO). Their key responsibilities include:

1️⃣ Structuring the FPO & Regulatory Compliance

✔ Help the company determine the size, timing, and pricing strategy of the FPO.
✔ Ensure compliance with SEBI (India) or SEC (USA) regulations, including preparing the Draft Red Herring Prospectus (DRHP).

2️⃣ Price Discovery & Book-Building Process

✔ Assist in setting the price band for the FPO based on market demand, valuation, and investor interest.
✔ Conduct the book-building process, where institutional investors bid for shares, helping determine the final cut-off price.

3️⃣ Marketing & Investor Outreach

✔ Promote the FPO to institutional investors, retail investors, and analysts.
✔ Conduct roadshows and presentations to generate investor confidence.

4️⃣ Underwriting & Risk Management

✔ Underwriters guarantee the sale of shares, reducing the risk for the company.
✔ If demand is low, they may purchase the remaining unsold shares, ensuring the company raises the targeted capital.

5️⃣ Post-FPO Support & Market Stabilization

✔ Help manage share price volatility after listing through market-making strategies.
✔ Advise on secondary market trading and liquidity support.

For an FPO (Follow-On Public Offering) to be considered successful, it must meet the minimum subscription criteria set by market regulators like SEBI (India) or SEC (USA).

1️⃣ Minimum Subscription Requirement (India - SEBI Guidelines)

✔ 90% Subscription Rule: In most cases, at least 90% of the total issue size must be subscribed.
✔ If the FPO fails to meet this threshold, the issue is canceled, and investor funds are refunded.

2️⃣ Institutional & Retail Participation Criteria

✔ Qualified Institutional Buyers (QIBs) must be allocated at least 50% of the issue size.
✔ Retail Investors should get at least 35% of the issue size.
✔ Non-Institutional Investors (HNIs/NIIs) are usually allocated 15% of the issue size.

3️⃣ What Happens if the FPO Is Undersubscribed?

✔ If the FPO does not reach 90% subscription, the company must refund all investor money.
✔ If underwriters are involved, they may buy the unsold shares to ensure success.

Yes, promoters can sell their stake in an FPO, but it depends on the type of FPO and regulatory guidelines.

1️⃣ Types of FPO & Promoter Participation

✔ Dilutive FPO: The company issues new shares, so promoter shareholding may reduce in percentage but they usually do not sell their existing stake.
✔ Non-Dilutive FPO (Offer for Sale - OFS): Promoters sell their existing shares, and the proceeds go to them instead of the company.

2️⃣ Regulatory Restrictions on Promoter Selling (India – SEBI Rules)

✔ Promoters cannot reduce their stake below the minimum shareholding requirement (usually promoters must hold at least 20% post-FPO).
✔ SEBI regulations prevent sudden or excessive promoter exits to protect investor confidence.

3️⃣ Market Impact of Promoter Selling

✔ If promoters sell a large stake, it may signal a lack of confidence in the company and negatively affect stock price.
✔ If they retain a majority stake, it reassures investors about long-term commitment.