What is the full form of FPO

FPO: Follow On Public Offer

FPO stands for Follow on Public Offer. It is a process through which a company that is listed on a stock exchange issues new shares to investors or existing shareholders, that are usually the promoters. In simple words, the issuance of new shares by a firm following an IPO (Initial Public Offering) is known as a Follow on Public Offer (FPO). Due to the fact that FPOs (Follow on Public Offers) are issued by companies that are already exchange-listed in order to raise equity or repay debts, they are also known as Secondary Offerings. FPOs don't exist without a firm being listed and having its IPO already on the market, which is how they differ from IPOs in timing and listing.

The Process of a Follow-on Public Offer (FPO)

Public companies may also get benefited from an FPO by submitting an offer document. FPOs and IPOs (Initial Public Offerings) should not be confused. After a corporation is registered on an exchange listing, additional new shares issues called FPOs are made.

A corporation launches its initial public offering (IPO) at the time of listing in order to receive market participation and raise funds for its operations with the guarantee of a profit from the public's contributions. The shares being offered may be brand-new shares provided by the company, pre-existing promoter shares, or private shares. The EPS tends to drop, which significantly alters the capital structure of the organization. Non-diluted offers are the secondary offerings in which only the old, privately held shares that are going public instead of any new shares are released. The EPS is not decreased; it stays the same. An At-The-Market offering takes place based on the price range. Since the FPO price is determined by market forces, in stark contrast to an IPO price that is predetermined within a specific price range, the firm can elect to step back from distributing the shares for that day if the price is not favorable to them. This enables the business to raise capital as and when it is needed.

Features of the Follow-On Public Offer (FPO)

• The published prices for FPOs are lower than the listed shares' current market pricing. The share's market price starts falling to the FPO issuance price as well.
• Since the company has already demonstrated its performance in the market, investment in FPOs is less risky than investing in an IPO.
• Investors with less knowledge have access to adequate but not difficult information to help them make an investment decision.

Types of Follow-On Public Offers

The two primary forms of follow-on public offerings are as follows. As the company's board of directors decides to expand the share float level or the number of accessible shares, the first is dilutive to investors. This form of follow-on public offering aims to obtain capital to lower debt or grow the business, increasing the number of shares outstanding in the process. The other form of non-dilutive follow-on public offers. When directors or major shareholders sell privately held shares, this strategy is helpful.

1. Dilution of the Following Offering

When a business issues extra shares to raise capital and sells those shares on the open market, it engages in a diluted follow-on offering. The earnings per share (EPS) declines as the number of shares rises. The most common uses for the money raised through an FPO are debt reduction and capital structure changes. The addition of capital is beneficial to the company's long-term future, which benefits its shares as well.

2. Follow-On Offering Without Diluting

Holders of current, privately held shares can sell previously issued shares on the open market in a non-diluted follow-on offering. When stock is sold non-diluted, the cash proceeds are given to the shareholders who sold the stock on the open market. These stockholders frequently serve as the company's founders, board of directors members, or pre-IPO investors. The company's EPS stays the same because no additional shares are issued. Secondary market offerings are another name for non-diluted follow-on offerings.

3. Market-Priced Offering (ATM)

By using an at-the-market (ATM) offering, the company issuing the share can raise money as needed. The company may choose not to offer shares if it is unhappy with the price at which they can be purchased on a particular day. Because ATM offerings can sell shares into the secondary trading market at the ongoing market rate, they are sometimes referred to as managed equity distributions.

Example

In the financial industry, follow-on offerings are typical. They give businesses a simple option to raise equity that can be applied to a variety of uses. Companies that announce secondary offers risk seeing a decline in their stock price as a result. Because secondary offers reduce existing shares and many are launched at prices below market, shareholders frequently respond negatively to them.

In 2015, many businesses that had gone public less than a year before launched follow-on offerings. One business whose shares dropped following rumors of a secondary offering was Shake Shack. On hearing about a sizable secondary offering that came in below the current share price, shares dropped by 16%.

In 2017, corporations raised $142.3 billion in equity through follow-on offerings. In 2017, there were 737 FPOs overall. This represented a 21% increase in FPOs compared to 2016. But in 2017, the value of FPOs decreased by 3% from the previous year.

Reasons for FPOs:

Companies launch Follow On Public Offerings (FPOs) for a variety of reasons, all of which attempt to accomplish certain goals. The following are some typical justifications given by businesses for choosing to do FPOs:

1. Capital needs for development and expansion: Businesses frequently need more money to support their expansion and growth ambitions. They can invest in new initiatives, grow their businesses, or enter new markets thanks to FPOs' ability to raise money from the secondary market.
2. Debt repayment and financial restructuring: Funds for debt repayment and financial restructuring can be raised through FPOs. Companies may strengthen their balance sheets, increase their creditworthiness, and improve their financial health by decreasing their debt loads.
3. Strategic acquisitions and mergers: FPOs give businesses the capacity to fund these types of mergers and acquisitions. Companies may fund acquisitions, strengthen their market position, and take advantage of synergies by raising funds through FPOs, all of which provide value for shareholders.
4. Improving public perception and brand recognition: FPOs give businesses a chance to improve public perception and raise brand recognition. Companies can garner investor interest, legitimacy, and possibly more customers by becoming public and raising money on the secondary market.

Key Participants in an FPO:

The execution of an FPO involves a number of key players, including the following:

1. Management and board of directors of the company: The management and board of directors of the company are in charge of determining the capital needs, determining whether an FPO is necessary, and making decisions on the offering. Additionally, they are in charge of making sure that regulatory standards are met and supplying required information to potential investors.
2. Underwriters and investment bankers: Underwriters and investment banks are essential to the FPO process. They assist businesses in setting the offering price, organizing the offering, and making it easier for investors to purchase shares. Investment bankers also help with regulatory authority coordination, due diligence, and marketing the offering.
3. Regulatory organizations and stock exchanges: Organizations that regulate FPOs to guarantee compliance with securities laws include the Securities and Exchange Commission (SEC) in the United States and the Securities and Exchange Board of India (SEBI) in India. The platform for listing shares and facilitating trade is provided by stock exchanges.
4. Institutional and retail investors: These two groups of investors make up the majority of an FPO's participants. Individual investors, known as "retail investors," purchase shares on the secondary market, whilst institutional investors, such as insurance companies, mutual funds, and pension funds, make bigger investments. The FPO's success depends on their participation.

Advantages and Disadvantages:

FPOs have a number of benefits and drawbacks that businesses should take into account before opting to launch a secondary market offering:

FPO advantages include:

1. Access to extra capital: Through FPOs, businesses may raise money on the secondary market, giving them the money, they need for development, expansion, and strategic plans.
2. Enhanced liquidity: FPOs can improve the marketability of a company's stock. Increased trading volume is more likely to occur when there are more shares available for trading, which may draw more investors.
3. Strengthened finances: Businesses can improve their financial standing by acquiring financing through an FPO. This may result in more financial stability, lower debt levels, and better credit ratings.
4. Investor trust and credibility: FPOs may increase investor trust and credibility in a firm. Making the firm publicly listed and having its shares exchanged on a reputable stock market may boost its visibility, draw in institutional investors, and foster goodwill among stakeholders.

FPO disadvantages:

1. holdings dilution: FPOs entail the issue of additional shares, which may dilute current shareholders' holdings. Existing shareholders may have a smaller ownership interest as a result of this dilution, which might affect their ability to influence corporate decisions.
2. Potential stock price decline: The additional shares made available through an FPO may cause the price of the company's stock to drop. This is especially true if the offering is viewed by the market as being overpriced or if there is little interest in the freshly issued shares.
3. The difficulty of complying with regulations: FPOs need compliance with rules that include submitting prospectuses, requesting permissions, and guaranteeing that the offering process is transparent. The company may be subject to significant administrative and legal costs as a result.
4. Market circumstances: The viability of an FPO is affected by the state of the market and investor attitude. The demand for the company's shares and the pricing and timing of the offering can both be impacted by unfavorable market circumstances or a decline in the stock market.

Successful FPO Case Studies:

Many businesses have successfully completed FPOs, utilizing the secondary market to generate finance and accomplish their strategic goals. The case studies that follow highlight a few noteworthy instances:

1. Reliance Industries Limited (India): In 2020, the Indian giant Reliance Industries Limited raised almost $7 billion through an FPO. The money was used by the business to lower debt and fortify its balance sheet. Investor interest in the offering was high, demonstrating their belief in the company's future growth.
2. Alibaba Group Holding Ltd. (China): The Chinese e-commerce behemoth Alibaba, one of the largest FPOs ever, raised more than $13 billion in 2019. The corporation utilized the money to pay for investments in technology, cloud computing, and digital media as part of its expansion goals.
3. General Electric Company (United States): The global company General Electric (GE) performed an FPO effectively in 2013, raising over $3.1 billion. The money was used to enhance GE's financial position, support its growth objectives, and lessen its reliance on financial services.
4. Apple Inc. (United States): Apple, a well-known technological business, successfully conducted an FPO in 2020, raising over $8.5 billion. The corporation used the money to boost its services division, diversify its product line, and make research and development investments.

The various goals that businesses might accomplish with FPOs, such as debt reduction, expansion, technological expenditures, and product diversification, are illustrated by these case studies. These products' success may be ascribed to elements including healthy market demand, good investor relations, and alluring growth potential.

In conclusion, FPOs are a crucial instrument for businesses to achieve their strategic goals and generate money from the secondary market. For businesses contemplating using an FPO as a fundraising strategy, it's critical to understand the motivations behind the initiative, the major players involved, and the benefits and drawbacks of these products. Companies may learn a lot about the implementation and results of FPOs from successful case studies, which enables them to use this financial tool with confidence.

FPOs and the Regulatory Environment:

The regulatory environment that applies to FPOs differs from nation to nation. To maintain investor safety, market integrity, and compliance with securities laws, regulatory agencies are essential in regulating FPOs. The following are some essential components of the legislation governing FPOs:

1. United States Securities and Exchange Commission (SEC): FPOs are governed by the Securities and Exchange Commission (SEC) in the United States. The registration statements, prospectuses, and other offering documents submitted by businesses looking to engage in FPOs are examined and approved by the SEC. The SEC makes sure that the offering documents give potential investors accurate and complete information.
2. Securities and Exchange Board of India (SEBI) - India: The Securities and Exchange Board of India (SEBI) oversees the regulation of FPOs in India. For FPOs, SEBI sets mandatory standards for disclosure, pricing, and investor protection. To guarantee regulatory compliance, it examines the prospectus and keeps an eye on how the offering is being conducted.
3. Prospectus requirements: In general, regulatory agencies demand that businesses create and submit a prospectus that contains in-depth details about the offering, the business, its finances, and any related risks. To help investors make wise investment decisions, the prospectus must contain important facts.
4. Rules governing pricing: Regulatory authorities may establish rules or standards regarding the cost of FPOs. These rules guarantee equity and restrict the sale of shares at materially inflated or depressed values.
5. Accurate and timely disclosures of important information are required by regulatory agencies from businesses throughout the FPO process. As a result, all investors have equal access to information and openness.
6. Investor protection: Regulatory organizations work to ensure the safety of investors by implementing rules that stop insider trading, market manipulation, and fraudulent acts. Companies must also follow corporate governance guidelines and put safeguards in place to protect the interests of investors according to these regulations.

Factors Affecting FPO Success:

The success of an FPO and the response it receives from investors are influenced by a number of factors. To increase the likelihood of a successful offering, businesses thinking about making an FPO should carefully assess the following factors:

1. Market circumstances and investor mood: An FPO's success is greatly influenced by the general market environment and investor attitude. More demand for the company's shares can be attracted by favorable market circumstances and a strong investor attitude, which can result in a successful offering. On the other hand, unfavorable market circumstances or unfavorable investor sentiment may affect the demand for shares.
2. Before making an investment in an FPO, investors carefully examine a company's financial record, growth prospects, and future profit potential. Investors are more interested in companies with good financials, a proven track record, and promising growth potential.
3. Pricing strategy and valuation: These are two crucial components of the offering's pricing strategy and valuation. Companies must find a balance between providing an appealing price to investors and making sure that the offering produces enough funds for the requirements of the firm. Undervalued offerings may result in lost fundraising possibilities, while overvalued offerings may discourage investors.
4. Timely and effective contact with investors: A successful FPO depends on timely and efficient communication with potential investors. To inspire trust and spark interest among investors, businesses should clearly communicate their development strategy, investment plans, and financial forecasts. It's crucial to respond to investor questions and concerns promptly.
5. Competitive environment and industry dynamics: These factors may influence investor interest in an FPO. Companies with appealing industries or specializations may have an edge in attracting investor interest.
6. Marketing and investor outreach: The performance of an FPO may be considerably impacted by an efficient marketing and investor outreach plan. Companies should deal with prominent underwriters and investment banks since they have wide networks and may assist in creating demand for the offering.

Companies may position themselves for a successful FPO and meet their capital-raising goals by taking into account these elements and doing an in-depth market study.