All Things To Know About Follow-on Public Offering (FPO)

1. What is FPO?

Follow on Public Offering (FPO) is the way by which a company that is already listed on a stock exchange can raise funds from the public. It must be sounding similar to an IPO, which is Initial Public Offering, however, they are different.

When a company raises funds from the public for the first time and then gets listed it’s called an IPO. Whereas when a company that is already listed on the exchange raises funds from the public it’s called FPO. Chronologically, FPO comes after an IPO

Before proceeding further, it’s important to understand two major types of FPO depending on how ownership is being given to new subscribers.

2. Types Of FPO

FPO can either be a Diluted FPO or a Non-Diluted FPO.

• DILUTED FPO: As the name suggests, there is dilution in the ownership of existing shareholders. Here, the company decides to issue new shares to the public which increases the total number of shares outstanding. When there is an increase in the number of shares, the ownership percentage of existing shares decreases since newly issued shares will also represent a certain proportion of ownership in the company.

• NON-DILUTED FPO: Here there is no dilution in ownership of existing shareholders because no new shares are issued. The shares which are offered to the public are shares that are held by non-public shareholders. Usually, these shareholders are Promoters, Directors of the company, or Pre-IPO investors.

3. Why Does A Company Bring Its FPO?

A company has 2 major sources of financing- one is the debt route and the other is by giving out ownership in the business through equity. Similarly, if a listed company needs financing it can either take debt or issue new shares through FPO. Following are some reasons why the company brings its FPO.

• A company can use Follow on Public Offering to raise funds to finance its expansion plans and future projects.
• If a company is overleveraged, it can decide to reduce its debt using the funds raised through FPO.
• However, the above two needs will be met only when the raised funds are coming in hands of the company. This happens in the case of Diluted FPO. In the case of Non-diluted FPO, the funds raised are distributed to the existing shareholders selling their shares.
• So, one of the primary reasons for having a Non-diluted FPO is when a company wants to increase the public shareholding in the company. A higher public shareholding facilitates greater public participation, which in turn leads to better price discovery of the shares.
• Having talked about FPOs and types of FPOs we need to look at them from an investor’s point of view.

4. How Does An FPO Affect An Investor?

• If a company is bringing its Follow on Public Offering and you are interested in that company’s business then it can be an opportunity for you.
• Generally, the price band for Follow on Public Offering is lower than the market price to ensure there is sufficient demand for the issue. So, if you find value in the company’s shares you can get them at a discount.
• Further, unlike an IPO there is more information available on the company’s performance, its management, and overall business. So investing in an FPO is less risky than in an IPO because of the above factors.
• However, there are a few things that should be looked at:-

1. If it’s a Non Diluted FPO you can research the company’s business in detail and see why existing private investors want to sell their shares. This will help in understanding why the company has decided to proceed with an FPO and what are the future prospects.
2. If it’s a Diluted FPO, you can research how the funds will be utilized and how Earning per share can change.
3. When a company is issuing new shares, which is done under Diluted FPO, earnings per share can change because the total number of shares has increased.
4. The earnings of the company can also change because if the company reduces its debt then interest payment would be lower, and if it uses funds for expansion then over the long term earnings from that project can increase total earnings.
5. Even if you are an existing shareholder the above information can help understand how your shareholding percentage and earnings per share can change.

Now if someone is interested in applying for an FPO how can it be done?

5. How to Apply For An FPO?

The process to apply for an FPO is similar to that of an IPO. It is done by placing orders through your broker.

We hope the above 5 points must have provided you with a better understanding of what an FPO is, and how it works. You can refer to the above points before applying for an FPO and make an informed decision.