Understand FPO (Follow-on Public Offer) — Stock-Market notes

WHAT is an FPO?

The key distinction lives in one word: already listed.

Feature	IPO	FPO
Company status	Unlisted (going public first time)	Already listed
Price discovery	No market price exists yet	Market price already exists
Risk to investor	Higher (no track record on exchange)	Lower (public financials + price history)
Purpose	First-time capital raise	Additional capital raise or existing-holder sale

WHY do companies do an FPO?

Raise fresh capital — fund expansion, pay off debt, working capital.
Let promoters/early investors exit — they sell part of their holding.
Meet regulatory minimum public shareholding — in India SEBI requires ≥25% public holding; promoters may pare down their stake to comply.

This purpose determines the type of offer:

HOW dilution works — derive it from first principles

We don't memorise "EPS falls." We derive why.

Figure — Understand FPO (Follow-on Public Offer)

Worked Examples

Worked example Example 1 — Dilutive FPO EPS effect

ABC Ltd has $N = 10{,}00{,}000$ shares and net earnings $E = ₹1{,}00{,}00{,}000$ . It issues $\Delta N = 2{,}00{,}000$ new shares in a dilutive FPO.

Old EPS $= \dfrac{1{,}00{,}00{,}000}{10{,}00{,}000} = ₹10$ . Why this step? EPS is defined as earnings ÷ shares — this is our baseline.

New EPS $= \dfrac{1{,}00{,}00{,}000}{12{,}00{,}000} = ₹8.33$ . Why this step? Earnings are unchanged the instant new shares appear, but the denominator grew.

Check with dilution factor: $\dfrac{N}{N+\Delta N} = \dfrac{10}{12} = 0.833$ , and $10 \times 0.833 = ₹8.33$ . ✅

Common Mistakes (Steel-manned)

Active Recall

Recall Answer before revealing

Q: A company issues 20% more shares in a dilutive FPO with unchanged earnings. By how much does EPS fall?

A: Dilution factor $= \frac{N}{1.2N} = 0.833$ , so EPS falls to 83.3% of old → a 16.7% drop.

Recall Feynman: explain it to a 12-year-old

Imagine a pizza place owned by 10 friends, one slice of profit each. Dilutive FPO: they invite 2 new friends and cut the pizza into 12 smaller slices — everyone's slice shrinks (that's EPS falling), but the shop got new money to buy a bigger oven. Non-dilutive sale: one friend just sells his slice to a stranger — still 10 slices, same size, but the friend pockets the cash, not the pizza shop. And because everyone can already see today's slice-price on the menu, they'll only buy a new slice if it's priced a little cheaper.

Flashcards

What is an FPO?

A public issue of shares by a company that is already listed on a stock exchange, done after its IPO — either issuing new shares or letting existing holders sell.

Key difference between IPO and FPO?

IPO is by an unlisted company (first offer, no market price); FPO is by an already-listed company (market price already exists).

What is a dilutive FPO?

The company issues new shares, increasing total share count; EPS falls and money goes to the company.

What is a non-dilutive FPO?

An FPO in which existing shareholders sell their own shares; share count and EPS unchanged; money goes to the sellers, not the company.

Is an OFS a subtype of FPO?

No — in India an Offer for Sale (OFS) is a distinct secondary-sale mechanism (a separate exchange window for existing holders to sell), not a legal subtype of FPO, though economically it is also non-dilutive.

Why is an FPO usually priced at or below current market price?

Because a live market price already exists — investors would just buy in the open market unless the FPO offers an attractive (discounted) price.

Formula for EPS and why dilution happens?

\text{EPS}=E/N

; issuing

\Delta N

new shares with unchanged

E

gives

E/(N+\Delta N)<

old EPS.

Dilution factor for issuing extra shares?

\text{EPS}_{new}/\text{EPS}_{old} = N/(N+\Delta N)

If a promoter sells his own 2 lakh shares, what happens to company's cash?

The company receives nothing — the promoter (seller) receives the cash.

One regulatory reason for a follow-on sale in India?

To meet SEBI's minimum 25% public shareholding requirement by selling promoter shares.

Connections

Understand IPO (Initial Public Offer)
Primary vs Secondary Market
Offer for Sale (OFS)
Earnings Per Share (EPS)
Share Dilution
SEBI Minimum Public Shareholding Norms
Price Discovery in Markets

Concept Map

Hinglish (regional understanding)

Intuition Hinglish mein samjho

Dekho, FPO ka matlab hai Follow-on Public Offer. Yeh tab hota hai jab ek company jo pehle se hi stock exchange par listed hai (yaani uska IPO ho chuka hai), wapas public ke paas jaati hai. Do tarah se — ya toh company naye shares banake fresh paisa raise karti hai, ya phir purane shareholders (promoters) apne shares bechte hain. IPO first date jaisa hai — company pehli baar public se milti hai; FPO repeat visit jaisa hai. Sabse important point: FPO me market price pehle se screen par dikh raha hota hai, isliye company usually thoda discount par price rakhti hai, warna investor open market se hi share khareed lega.

Do flavour samajh lo. Dilutive FPO me company bilkul naye shares banati hai — total share count badh jaata hai, earnings same rehti hai, isliye EPS = Earnings/Shares me denominator badhne se EPS gir jaata hai. Yeh cash company ko milta hai. Doosra hai non-dilutive sale — yaha promoter apne hi purane shares bechta hai, koi naya share nahi banta, share count same, EPS same, aur cash seller ko jaata hai, company ko nahi. Ek zaroori baat: India me OFS (Offer for Sale) ek alag mechanism hai — exchange ka apna window jisme promoter purane shares bechta hai — yeh technically FPO ka subtype nahi hai, bas economically dono non-dilutive hote hain.

EPS wali baat ratne ki zaroorat nahi — pizza soch. 10 doston ke paas 10 slice hain. Dilutive FPO me 2 naye dost aaye aur pizza ko 12 chhote slice me kaat diya — har slice chhota (EPS gira), par company ko naya paisa mila. Non-dilutive sale me ek dost apna slice ek ajnabi ko bech deta hai — abhi bhi 10 slice, same size, bas cash dost ki jeb me gaya.

Exam aur real investing dono me yeh farak poochte hain: hamesha khud se poocho — naye shares ban rahe hain ya purane bech rahe hain? Isi se pata chalega EPS girega ya nahi, aur paisa company ko milega ya promoter ko. Yahi FPO ka core hai.

Test yourself — Primary vs Secondary Market & IPOs

Connections