FPO stands for Follow-on Public Offering or Further Public Offering. It is a process by which a publicly traded company issues additional shares of its stock to the public after its initial public offering (IPO).
An FPO occurs when a firm already has its shares listed on a stock market and intends to offer more shares to obtain funds. The new shares are available to existing owners as well as new investors. The company needs additional funds for various purposes like growing its business, paying off debts, researching, or buying other companies.
To carry out the FPO process, the company hires an investment bank or underwriter to determine the offering price and market the shares to potential investors.
When a company does an FPO, the people who already own shares and new people can buy more shares, allowing existing shareholders to have more ownership. New people can become shareholders for the first time.
FPOs are a popular way for companies to raise more capital from the public. They can affect the company’s stock price and overall value in the stock market.
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FPO in the Context of the Nepal Stock Market
A Further Public Offering (FPO) in Nepal refers to issuing shares to general investors by a public company already listed on the Nepal Stock Exchange Limited (NEPSE). FPOs are a popular method for companies to raise additional share capital in the Nepali market.
What are the Conditions for raising FPO in Nepal?
To qualify for an FPO in Nepal, a company must meet certain requirements per the Securities Registration and Issue Regulation Act 2065. These include:
- The company should have at least two years of profitability in the last five years.
- The net worth per share should be higher than the paid-up capital per share.
- The company’s Annual General Meeting should endorse the agenda of the FPO.
- If the company intends to issue the FPO at a premium price, it must provide a reason for such pricing and disclose the process used to fix the price.
- According to clause 30 of the act, a descriptive document should be published.
As per the Securities Issue Guidelines, 2065 outline, the documents required to be presented before the Securities Board of Nepal (SEBON) to issue shares at a premium price are :
- Details of the requirements as per the Company Law
- Calculate the premium price of the shares to be issued and base for issuance.
The SEBON will allow floating FPOs at a premium price if the application meets all the requirements of Sub Clause (1).
Importance of FPO
FPOs are an important way for businesses to generate additional capital. Companies can raise money by selling new shares to the public, which is required for various purposes such as expanding their operations, investing in research and development, purchasing other firms, or paying off debts. Capital investment enables companies to focus on growth and enhance their financial position.
Flexible and Scalable
FPOs give companies flexibility in raising money. They can sell more shares based on how much they need, which allows them to access a wider group of investors and adjust the offering size according to their needs.
Increased Market Visibility
FPOs make companies more visible in the financial markets. Companies attract attention from investors, analysts, and the media by offering additional shares to the public. This attention can improve the company’s reputation and attract more investors in the future.
FPOs let existing shareholders buy more shares and be part of the company’s growth. FPO allows current shareholders to own more of the company and benefit from its success. FPOs can also attract new investors who want to invest in a growing company.
By increasing the number of shares available in the market, FPOs can enhance the liquidity of a company’s stock. Improved liquidity means that it becomes easier for investors to buy and sell shares in the company, which can contribute to a more efficient market for the company’s stock and potentially attract more investors, including big institutions.
Benefits /Advantages of FPO
- FPOs allow companies to raise more money by selling additional shares to the public, providing funds for growth and various business initiatives.
- FPOs increase a company’s exposure in the financial markets, attracting attention from investors, analysts, and the media.
- FPOs make buying and selling a company’s stock simpler, increasing its value to investors and attracting institutional investors.
- FPOs offer existing shareholders to increase their ownership participation and connect their interests with the growth and success of the business.
- FPOs allow you to customize the offering size and reach a wider range of potential investors.
- FPOs can be a more cost-effective option than other forms of financing, such as debt, as they avoid interest payments and the ability to use the company’s current public position.
Disadvantages of FPO
Existing shareholders may own less of the company due to FPOs, which could limit their influence and reduce their earnings per share.
Stock Price Volatility
When an FPO is announced and put into effect, the company’s stock price may experience higher fluctuations as the market adjusts to the increased supply of shares and their effect on current shareholders.
Regulatory Requirements and Costs
FPOs can be time-consuming and costly for the company due to filing requirements, related legal fees, administrative costs, and fulfilling regulatory duties.
Market Perception and Investor Sentiment
FPOs that are poorly accepted or regarded as desperate actions can harm the company’s reputation and investor sentiment, which impacts stock prices and overall investor confidence.
Timing and Market Conditions
The timing and current market conditions can have an impact on the success of an FPO. Volatile markets or a lack of investor interest in new offers may make it easier to achieve the intended objectives.
Potential Conflicts of Interest
The involvement of investment banks or underwriters in managing the FPO can create conflicts of interest, as their compensation may depend on the offering’s success, influencing pricing and execution decisions.
TYPES OF FPO
A dilutive FPO is a type of offering where a company issues additional shares to the public and increases the total number of shares available in the market. As a result, existing shareholders’ ownership percentage in the company may decrease or become diluted because their ownership is spread over a larger number of shares. Dilutive FPOs are commonly conducted when a company needs to raise extra capital to finance expansions, acquire, or repay debts.
A non-dilutive FPO involves the sale of existing shares by the company or its current shareholders to the public without creating new shares. Unlike a dilutive FPO, this offering does not increase the total outstanding shares. Consequently, the ownership percentage of existing shareholders remains the same since their ownership is not diluted. Non-dilutive FPOs are typically carried out by companies or shareholders who wish to monetize their existing holdings, raise funds for specific objectives, or provide liquidity to shareholders.
Thus, both types of FPOs have their advantages and considerations. Dilutive FPOs offer opportunities for companies to raise significant capital for growth, although it may lead to dilution of ownership. On the other hand, non-dilutive FPOs provide liquidity options for existing shareholders without affecting their ownership percentages. However, they may not raise new capital for the company. The choice between these types of FPOs depends on the company’s financial goals, market conditions, and the preferences of its shareholders.
Difference Between FPO and IPO
|The first time a company offers its shares to the public for trading on a stock exchange.
|Subsequent offering of shares by a company that is already listed on a stock exchange.
|Raises capital to fund growth, expansion, or other business initiatives.
|Raises additional capital for various purposes like paying off debts, doing research, or buying other companies.
|Conducted when a private company decides to go public.
|Conducted after the company is already publicly traded.
|Company is transitioning from being privately held to publicly trade.
|Company is already established and has shares listed on a stock exchange.
|Involves higher risk as it marks the company’s transition into the public market.
|Typically carries lower risk compared to IPOs as the company is already established.
|Offered to the general public, institutional investors, and selected investors.
|Offered to existing shareholders and new investors.
|Usually raises larger amount of capital.
|Typically raises smaller amount of capital.
|Underwriters determine the initial share price.
|Share price may be determined by market demand.
|Initial prices can experience significant fluctuations.
|Prices are often more stable.
|Generates significant market buzz and attention as the company enters the public market.
|Provides an opportunity to increase market visibility and attract investor attention.
|IPO is issued by unlisted company.
|FPO is issued by listed companies.
|Higher than FPO.
|Lower than IPO.
FPOs are a valuable tool for companies to raise additional capital, enhance market visibility, increase liquidity, and provide opportunities for existing and new shareholders. While FPOs come with their own set of considerations, their advantages make them a popular choice for companies seeking growth and financial stability in the dynamic world of finance.