What is FPO? A Guide for Beginners
If you follow the stock market, you might have heard the term FPO. Many new investors know about IPOs, but are unsure about FPOs—what they are, why companies do them, and whether retail investors should apply. This simple, beginner-friendly guide explains everything you need to know about FPOs in India.
 |
| What is FPO? Explained for Beginners |
Table of Contents
- What is FPO?
- FPO vs IPO: What’s the Difference?
- Why Do Companies Launch an FPO?
- Types of FPO
- How an FPO Works (Step-by-Step)
- Pricing Methods in FPO
- Who Can Apply & Minimum Investment
- How to Apply for an FPO (ASBA/UPI)
- Benefits of FPOs
- Risks & Things to Check Before Applying
- Quick Pre-Application Checklist
- FAQs on FPO
- Conclusion
What is FPO?
FPO stands for Follow-on Public Offer. It is a process where an already listed company issues (or sells) additional shares to the public after its IPO. The aim is usually to raise more capital or allow existing shareholders to sell some of their holdings to the public.
Think of it like this: IPO is the company’s first step into the stock market. FPO is a later step—taken after the company is already listed and trading on the exchange.
FPO vs IPO: What’s the Difference?
| Feature | IPO | FPO |
|---|---|---|
| Meaning | First-time issue of shares to the public | Follow-on issue/sale after the company is already listed |
| Company Status | Unlisted (private) before IPO | Already listed on NSE/BSE |
| Purpose | Raise funds, listing benefits, brand visibility | Raise more funds or enable existing holders to sell |
| Information Availability | Limited trading history | Live trading history, quarterly results, disclosures available |
| Pricing | Fixed or book-building | Fixed or book-building; often at a discount to market price |
| Risk for Investors | Higher uncertainty | Comparatively easier to evaluate (public data exists) |
Why Do Companies Launch an FPO?
- Growth capital: Fund expansion, new projects, acquisitions, R&D.
- Debt reduction: Lower interest costs and improve balance sheet strength.
- Public float: Increase the number of shares available to the public (free float).
- Shareholder liquidity: Allow large existing shareholders to sell part of their stake.
- Corporate objectives: Improve visibility, bring in new institutional investors, diversify holding base.
Types of FPO
- Primary (Dilutive) FPO: The company issues new shares. Total share count increases, and existing shareholders get diluted. Cash raised goes to the company.
- Secondary (Non-Dilutive) FPO: Existing shareholders (promoters, PE funds, government, etc.) sell their existing shares. Share count does not increase. Proceeds go to the selling shareholders, not the company.
- Mixed FPO: Combination of primary and secondary components.
How an FPO Works (Step-by-Step)
- Board approval & advisors: Company’s board approves the FPO and appoints merchant bankers, legal advisors, and auditors.
- Draft offer document: Company files an offer document with the regulator and exchanges, detailing business, risks, and financials.
- Price band & timeline: The company announces the price band, lot size, bidding dates, and categories (QIB, NII, Retail).
- Bidding window: Typically open for 3 market days. Investors place bids via ASBA/UPI.
- Price discovery: In book-built FPOs, the final price is discovered based on demand across the band.
- Allotment & refund: Shares are allotted; unblocked/refunds happen for unsuccessful bids.
- Listing/trading: Additional shares get listed; trading continues as usual.
Pricing Methods in FPO
- Fixed Price: A single price for all applicants (e.g., ₹120 per share).
- Book-Building: A price range (e.g., ₹115–₹125) is announced. Investors bid within the band; final price is set after evaluating demand.
Note: FPOs are often offered at a small discount to the prevailing market price to make them attractive to investors. Check the discount carefully—it can influence short-term return potential.
Who Can Apply & Minimum Investment
- Eligible investors: Retail individuals, HNIs/NII, and QIBs can participate, similar to IPOs.
- Demat account required: You must have an active Demat account and PAN.
- Minimum investment: Depends on the lot size decided for the FPO. For retail, the minimum is typically one lot, which may vary by issue.
How to Apply for an FPO (ASBA/UPI)
- Through broker app: Open your broker’s IPO/FPO section, choose the FPO, enter bid quantity (in lots), price (cut-off or a specific price), and UPI ID if required.
- Through your bank (ASBA): Log into net banking, go to the ASBA/FPO page, select the FPO, and submit your bid. Funds remain blocked until allotment.
- Approve the mandate: If applying via UPI, accept the mandate request in your UPI app within the deadline.
- Track status: Check your application status with your broker/bank and later on the registrar’s website post-issue.
Benefits of FPOs
- More data to evaluate: Unlike IPOs, listed companies have trading history, quarterly results, and public disclosures—helpful for analysis.
- Potential discount to market price: Can be attractive for short-term and long-term investors.
- Strengthened balance sheet (primary FPOs): Fresh capital can reduce debt and fund growth.
- Diversified ownership: Increased free float can improve liquidity and price discovery over time.
Risks & Things to Check Before Applying
- Dilution risk (primary FPO): New shares increase total equity, which can dilute EPS in the short term.
- Overhang risk (secondary FPO): If large shareholders sell, it may create supply pressure.
- Valuation risk: Even after a discount, the offer may still be expensive versus peers.
- Use of proceeds: For primary FPOs, ensure the funds will be used productively (growth, debt reduction).
- Market volatility: Weak market sentiment can hurt short-term returns even if fundamentals are fine.
Quick Pre-Application Checklist
- Read the offer document summary, risk factors, and use of proceeds.
- Compare valuations (P/E, EV/EBITDA, P/B) versus peers.
- Review recent quarterly results, margin trends, debt levels, and cash flows.
- Check promoter shareholding and any pledges.
- Look at pricing vs current market price and any announced discount for retail.
- Decide your objective: listing/short-term vs long-term holding.
FAQs on FPO
Q1. What is the full form of FPO?
FPO stands for Follow-on Public Offer.
Q2. How is FPO different from IPO?
IPO is the first public issue by an unlisted company. FPO happens after the company is already listed and trading.
Q3. Can retail investors apply in FPOs?
Yes. Retail investors can apply via ASBA/UPI through brokers or banks.
Q4. Is FPO always at a discount to market price?
Not always, but many FPOs are priced at a small discount to encourage participation.
Q5. Does FPO dilute existing shareholders?
Only primary FPOs (new shares) cause dilution. Secondary FPOs (sale by existing holders) do not dilute.
Q6. How long does an FPO remain open?
Generally 3 market days for public bidding, similar to IPOs.
Q7. How do I check allotment for an FPO?
After the issue closes, check on the registrar’s website using your PAN/application number or through your broker.
Q8. Is FPO safer than IPO?
“Safer” is subjective. FPOs offer more public information for analysis, but market and valuation risks still apply.
Conclusion
FPOs allow listed companies to raise additional funds or enable existing shareholders to sell part of their stake. For investors, FPOs can be attractive—especially when offered at a reasonable discount and when the company has strong fundamentals. As always, evaluate the business, valuation, and use of proceeds before applying, and invest according to your risk appetite and goals.
Suggested Reading
Disclaimer: This article is for educational purposes only and is not investment advice. Please do your own research or consult a SEBI-registered advisor before investing.
0 Comments