The Context
Adani Enterprises Limited recently announced that it has canceled its upcoming Follow-on Public Offer (FPO). While this news may come as a surprise to some, it is important to understand the significance of FPOs in the world of finance and why companies choose to go through with them. An FPO refers to a public offering of stocks by an already publicly traded company. This type of offering allows the company to raise additional capital by selling more shares of its stock to the public. The capital raised can be used for a variety of purposes, such as expanding the business, reducing debt, or financing new projects.
There are several reasons why companies opt for FPOs.
- Firstly, it is a quick and efficient way to raise capital without having to go through the lengthy and complex process of issuing new bonds or taking out a loan.
- Secondly, FPOs provide an opportunity for the company to increase its market capitalization, which can make it more attractive to investors.
- Thirdly, by issuing more shares, a company can improve its liquidity, making it easier for shareholders to buy or sell shares as needed.
FPO abbreviated as Follow-on Public Offer is a process in which an existing company listed on the stock exchange issue new shares to the existing shareholders or to the new investors. It is different from an IPO where the company issue its shares to its public for the first time to collect funds in order to grow their business. The reason behind the company performing an FPO is to expand its equity base. The company uses FPO only after the company has started the process of an IPO to make their shares available to the public and to raise capital for their business.
What is the Difference between IPO and FPO?
IPO stands for Initial Public Offering, a process in which a private company goes public by issuing shares to the general public for the first time. This is a relatively high investment since the investor does not have the opportunity to track the previous stats or records of the particular company to analyze before investing.
On the other hand, FPO is used by an already listed company in the stock exchange. This helps the investors to see the market trends and track their investments before making a decision. IPO’s are generally used by private entities to expand their funds, and FPO’s are used by government entities to cover their debts or reduce their stake in the company.
FPO (Follow-on Public Offer) Vs IPO (Initial Public Offer)
| FPO | IPO |
|---|---|
| Refers to the sale of existing shares of a company to the public. | Refers to the sale of newly issued shares of a company to the public. |
| Usually occurs after the company has already gone public and its shares are listed on a stock exchange. | Marks the first time a company goes public and its shares are listed on a stock exchange. |
| Offers existing shareholders an opportunity to sell their shares to the public. | Offers the company an opportunity to raise capital by selling new shares to the public. |
| The company usually has a well-established track record and has already built up a reputation in the market. | The company is unknown to the public and its reputation needs to be established. |
| The process is typically faster and easier than an IPO as the company is already listed on a stock exchange. | The process is longer and more complex, as the company has to go through the listing process. |
| The price of shares in an FPO is determined based on market demand. | The price of shares in an IPO is set by the company and underwriters, and is often higher than the market price. |
| FPOs are generally less risky for investors as the company has a proven track record. | IPOs are riskier for investors as the company is untested in the public market. |
Types of FPO?
There are two different types which a company can conduct Follow on Public Offer (FPO):
1. Dilutive FPO
2. Non-Dilutive FPO
Dilutive FPO
In dilutive FPO, the company issue additional number of shares but the price value of the company’s share does not changes and remains the same. This overall decreases reduction in earnings per share as well as the share price. Here, the company’s board releases new share offerings to the public. However, an FPO is used by a company only to reduce the debt or to raise additional capital of the company.
Non-Dilutive FPO
Non-Dilutive FPO means the shareholders of the company sell their private shares to the public. Here the money directly goes to the individual offering and not to the company. Thus, the per-share earnings of the company does not get affected.
Why Does a Company Need an FPO?
A company needs a Follow on Public Offer to raise additional capital for several major reasons, and it is fulfilled by conducting a dilutive FPO where new shares are offered. A large amount of money is generated.
What Happens in an FPO?
The share price issued in an FPO is lower than the prevailing market price. The primary motive behind issuing shares at a lower price is attracting and getting more subscribers to its issue. However, lower demand of the share price instantly lowers the market price and levels it with the FPO issue price.
Should You Subscribe For an FPO?
FPO is generally considered an advantage compared to IPOS because investors get an idea about the company’s management, business practices, and potential growth. The company listed on the stock exchange is not new, and investors will get the historical reference for its earnings report, the performance of the stock market, and much data to bank on.
FPO tend to have less risk than IPO because the price fixed for an IPO is lower than the market price to attract shareholders to invest more in FPO. Several shareholders engage in the FPO to buy shares at a discounted market price and sell them in the market to gain a premium on their transaction. A lot of research is required in FPO to know about the company and its past performance, but the degree of homework in FPO is a lot easier.
Hence it goes well for risky investors and gives them an opportunity to access shares of a company at a discounted price.
FAQS
What does IPO stands for?
IPO stands for Initial Public Offering, a process in which a private company goes public by issuing shares to the general public for the first time.
What is FPO?
FPO abbreviated as Follow on Public Offer is a process in which an existing company listed on the stock exchange issue new shares to the existing shareholders or to the new investors.
How many types of IPO are there?
There are two different types which a company can conduct Follow on Public Offer (FPO):
1. Dilutive FPO
2. Non-Dilutive FPO
What does Non-Dilutive FPO mean?
Non-Dilutive FPO means the shareholders of the company sell their private shares to the public. Here the money directly goes to the individual offering and not to the company. Thus, the per-share earnings of the company does not get affected.
IPOs and FPOs are used by which entities?
IPO’s are generally used by private entities to expand their funds, and FPO’s are used by government entities to cover their debts or reduce their stake in the company.
Final Thoughts
Investing in FPOs is considered to be a reliable option than IPO’s because it carries less risk. However, they are more reliable because the company is already listed on the stock exchange, and there is additional information available about the company to the investors.
Companies must ensure that they are able to generate enough demand for the additional shares being offered, as this will determine the success of the FPO. Companies also need to be mindful of the dilution effect, as issuing more shares will decrease the value of existing shares. Additionally, companies must adhere to regulatory requirements, such as filing prospectuses and meeting reporting obligations.
In conclusion, FPOs are an important tool for companies to raise capital, increase market capitalization, and improve liquidity. However, companies must weigh the benefits against the potential challenges and be prepared to navigate the regulatory requirements. The cancellation of Adani Enterprise’s FPO may have been due to a variety of reasons, but it highlights the importance of understanding the significance of FPOs in the world of finance.
