In recent times, even amidst the challenging backdrop of the pandemic, well-known companies like Nykaa, Zomato, and Paytm have made headlines with their Initial Public Offerings (IPOs). These IPOs have attracted significant attention from even new investors and helped companies to raise initial capital from their public listing. So most of you must be aware of the IPOs and how they work. But have you ever wondered what happens when these companies need more capital?
In this blog, we will explain to you how companies raise more capital through FPOs, the FPO process, the types of FPOs, how to assess them, and much more.
What is an FPO in Stock Market?
A Follow-on Public Offer (FPO) is a process where a company, already listed on the stock exchange, issues new shares to its existing shareholders or potential new investors. This is a financial tool used by companies that have already gone public via an IPO and need to raise additional funds. The money generated from an FPO may be used to reduce the company’s existing debt or to serve as additional capital for the company’s expansion.
How Does an FPO Differ from an IPO?
An Initial Public Offering (IPO) is the process by which a private company becomes publicly traded on a stock exchange. During an IPO, a company issues shares to the general public for the first time to raise capital for business growth.
However, an FPO is a different ballgame. An FPO allows already listed public companies to issue additional shares, unlike in the case of an IPO.
What are the types of FPOs?
Interestingly, not all FPOs are created equal. They fall into two primary categories: Dilutive FPOs and Non-Dilutive FPOs.
Dilutive FPOs
In a Dilutive FPO, the company issues additional shares without altering the overall value of the company. This results in a reduction in earnings per share and, potentially, the share price. The primary motive behind a Dilutive FPO is to reduce existing debt or raise additional capital for the company.
Non-Dilutive FPOs
In contrast, a Non-Dilutive FPO occurs when existing shareholders sell their private shares to the public. The funds from this type of FPO go directly to the individual shareholder offering the shares, and the company’s earnings per share remain unaffected, since no new shares are issued during the process.
Why do Companies go for an FPO?
The fundamental reason a company might choose to launch an FPO is to raise additional capital. This could be due to various needs, such as financing a new venture, reducing outstanding debt, or providing a financial buffer for future endeavours.
What Should You Expect During an FPO?
During an FPO, shares are typically issued at a price lower than the prevailing market price. This strategy is designed to attract subscribers and encourage more investment. However, if demand for these shares is low, it can lead to a fall in the market price to align with the FPO issue price.
How Do You Assess an FPO?
There is no one-size-fits-all answer to this question, as it significantly depends on the investor’s risk tolerance, financial goals, and understanding about the company. However, some common factors to consider while evaluating an FPO include the company’s past performance, the price of the shares compared to the market price, and the intended use of the funds raised through the FPO.
When examining a company’s past performance, look at its earnings reports, historical stock price trends, and the overall health of its financial statements. These factors can provide a solid foundation for understanding the potential risks and rewards associated with investing in the company’s FPO.
Is Subscribing to an FPO a Good Idea?
Investing in an FPO could be an advantageous move compared to investing in an IPO. This is because an FPO allows investors to evaluate the company’s track record, business practices, and growth potential before deciding.
Furthermore, the price fixed for shares in an FPO is usually lower than the market price, making it an attractive proposition for shareholders.
What is the benefit of FPO in the stock market?
FPO offers the following benefits:
- Increased capital: FPO allows a company to raise additional capital by issuing new shares to the public, enabling it to fund expansion plans, repay debts, or invest in new projects.
- Enhanced liquidity: FPO increases the number of shares available for trading in the market, potentially enhancing the liquidity of the company’s stock and attracting more investors.
- Market visibility and credibility: Conducting an FPO can boost the company’s visibility and credibility in the market, signalling growth and stability, which may attract new investors and potentially positively impact the company’s stock price.
What Are the Risks and Rewards of Investing in an FPO?
Like all investment opportunities, FPOs come with both potential risks and rewards. One of the significant advantages of investing in an FPO is the opportunity to buy shares at a lower price than the current market rate. This could result in profitable returns if the market price rises after the FPO.
However, investing in an FPO also comes with risks. For instance, if the market price of the shares falls after the FPO, investors may face losses. Therefore, it’s crucial to thoroughly analyse the company and its financials before investing in an FPO.
Final Thoughts
Whether you are a seasoned investor or a newcomer to the world of finance, understanding FPOs can expand your investment options and potentially boost your portfolio’s performance. As always, remember that successful investing is not merely about taking opportunities but about understanding them.
At WealthDesk, we help you to invest in WealthBaskets, i.e. the combinations of stocks and ETFs reflecting an idea, theme, or investment strategy, and are created by SEBI-licensed investment advisors and research analysts.
FAQs
Yes, once the allocation process is complete and the shares are credited into your demat account, you can sell the shares received from an FPO like ordinary shares through your trading account on the stock exchange.
Depending upon a company’s track record and the mood of equity markets and the specific sector in which the company operates, an FPO may or may not be profitable. It is always better to do one’s own due diligence while applying for an FPO.
After the FPO shares of the company are credited to the applicant’s demat account, they can sell on an exchange or keep on holding.
The number of shares freely available for trading between people increases after an FPO. Hence liquidity of the company’s stock improves after an FPO.
