FPO in Share Market | Difference Between IPO and FPO | How Does an FPO Work?
FPO Means?
The company which issues its shares is known as the issuer and the method of issuing shares to the public is know as Initial Public Offer(IPO).
An issuer which has already made an Initial Public Offer in the past and is now making a further issue of securities to the public is making a Follow-up Public offer also know as FPO.
In short, FPO means an offer of specified securities by a listed issuer organization to the public for subscription.
Also Read IPOs Definition | Types of IPOs | Fixed Price vs Book Building | Investors Types | Eligibility 2021
An Follow-up Public is offered when the company is already listed.
This permits the investors to look at share market trends and track their potential investment for a while before they make the selection.
FPOs are popular process for companies to raise additional equity capital in the capital markets via a stock issue.
The application method is similar to that of IPOs.
Why Do Companies need an FPOs?
Issuer choices the Follow-up Public route as it offers freedom in pricing the issue, as compared a QIP (Qualified Institutional Placement) direction that requires pricing around recent market prices as per a SEBI (Securities and Exchange Board of India) guideline.
The issue price for an Follow-up Public is mostly lower than the prevailing market price.
Therefore, this is done by the company to get more subscribers to its issue.
This is sometimes also known as a secondary offering.
How does an Follow-up Public work?
Let’s understand with an example, there is a company known as XYZ, which is already a listed company.
It looks to sell additional shares to raise more capital.
Therefore, the company XYZ would hire an investment bank to underwrite the offering, register it with SEBI and then handle the sale of the secondary shares.
Types of FPO
- Dilutive Follow-up Public
The company’s board of directors (B of D) agrees to raise the share float in order to sell more equity in the market.
Normally, this type of Follow-up Public is issued to raise capital to reduce current debt or expand the business. - Non-dilutive Follow-up Public
In this type, owners of existing privately-held shares offer their shares in the exchange market.
Generally, a non-dilutive happens, if the original Initial Public Offer (IPO) had a lock-up period.
The lock-up period prevents founders & board of directors (BofD) from selling their shares during the IPO.
A lot of organization agrees to have a lock-up period to infuse confidence in the market and provide stability during the IPO.
In this purpose, a non-dilutive gives these shareholders a way to monetize their position.
Difference between IPO and FPO
| Features | IPO | FPO |
|---|---|---|
| Stands for | Initial Public Offering. | Follow-on Public Offering. |
| Definition | This is the first time when a private company decides to proceed public and get listed in the stock exchanges. | FPO means an offer of securities for subscription to public, by an publicly traded enterprise. |
| Issuer | Unlisted Company. | Listed Company. |
| Objective | Raising capital for the first time via the general public. | Subsequent public investment. |
| Raising Capital | First time from investors. | Subsequent contribution from investors. |
| Risk | High | Comparatively Low |
| Predictability | Less predictable than FPO. | More predictable than IPO. |
| Types | Equity and Preferred shares. | Dilutive and Non-Dilutive. |
How to Buy FPO?
The method to apply is the same as it is for an IPO.
You can apply for FPO using UPI ID as a payment option on the NSE and BSE.
All you need to do is tell your broker to use your UPI ID when he submits the FPO request.
Source – NSE & BSE