Understand the meaning of Follow-on Public Offering (FPO)

We're sure you've heard of companies launching IPOs. But ever heard of an FPO?

When companies decide to go public, they decide to sell their shares on the stock market to the general population, i.e., retail investors. The first set of shares a company opens for the public to buy is offered through an IPO or initial public offering. In case the company has more shares to issue, it extends the IPO as a follow-on public offering or an FPO.

Curious? Find out all you need to know about FPOs here!

What is an FPO?

A follow-on public offer (FPO) is the process followed by a company to offer more shares to the public after the IPO is complete. Since it comes after the initial offering, it is also called a secondary offering. While a company may issue an FPO for many reasons, the prime cause is to raise funds.

Why do companies need follow-on public offers?

FPOs serve many purposes, from raising capital to reducing debt burdens. A public company may opt for a secondary offering of its shares for these reasons.

1. To raise funds

An FPO allows companies to raise additional capital when the need arises. Companies can channel the funds they generate through an FPO to fund new initiatives or launch new projects. The public contributes to the company's growth through the follow-on public offer.

2. To reduce debt

Yet another reason why a company might issue an FPO is when it needs to get rid of some of its debt burden. The money raised through the FPO pays off the company's debt and improves its debt-to-value ratio.

3. To diversify shareholders

When existing shareholders wish to sell their shares, that is a good time for a company to announce a follow-on public offer. As a result, a new and diverse set of shareholders become part of the company.

Types of Follow-on Public Offers

1. Dilutive FPOs

If a company decides to increase the number of shares by issuing new shares, it is a dilutive FPO. In this case, there is a dilution in the ownership percentage of existing shareholders and, thus, the name.

2. Non-Dilutive FPOs

In a non-dilutive FPO, there are new shares issued. Instead, companies offer existing non-public shares to the public.

This table breaks down the differences between dilutive and non-dilutive FPOs. 

What are the advantages of at-the-market (ATM) offerings?

With at-the-market offerings, companies can sell their shares directly to the general public over time. Here are its benefits:

- Flexibility: With ATM, companies can assess investor demand and market sentiment to issue shares in real-time, reducing the chances of low subscription.

- Market price: In ATM offering, companies issue their shares at prevailing market prices, leading to better investment returns.- Cost-effective: Companies do not need the assistance of investment bankers to issue shares through ATM offerings, making them cost-effective.

What are the disadvantages of at-the-market (ATM) offerings?

ATM offerings are typically used to raise smaller amounts of capital compared to more traditional follow-on offerings. Therefore, they might not be suitable for businesses seeking to raise substantial sums of capital. Moreover, the pricing of securities in ATM offerings is influenced by market conditions, which can result in fluctuations.

How is an FPO different from an IPO?

Apart from the most obvious difference that an IPO is an initial offering, while an FPO is a secondary offering, some other features make an IPO and FPO different. 

1. When a company issues a follow-on public offer, more information about the firm is available compared to the time of an IPO. The availability of information reduces the risk for investors.

2. IPOs usually have a larger offer size than FPOs, as follow-on public offers consist of only newly-added or outstanding shares.

3. Share prices in an FPO are usually lower compared to an IPO. In an FPO, share prices are market-driven, and companies must lower their share prices to increase demand.

What does an FPO mean for an investor?

Leveraging follow-on public offers can prove to be very lucrative for investors. But, before you decide to invest in shares offered in an FPO, take a moment to consider the following.

1. Review the information as an investor

Companies that issue FPOs are usually well-known and established. You would have access to reports on its performance, management style, and all the data to help you make an informed decision.

2. Consider buying FPOs which are affordable 

Follow-on public offers issue shares at a price lower than the market price. This helps to generate demand. If shares of a company interest you, an FPO might be the best time to take the plunge and invest.

3. Ask “why”

When a company issues a non-dilutive FPO, this usually means that existing shareholders are selling their shares. Before investing in these shares, find out why existing shareholders are selling. This information will tell you the motivations behind an FPO and how the company's future looks.

4. Ask “how”

When funds are raised through a dilutive FPO, find out how these funds will be used before investing. Understand the company's plans for the future to help you determine what your earnings per share are likely to be. 

How to apply for an FPO?

The process of applying for an FPO is similar to the application process required for an IPO. Your investment in an FPO would fall in the Retail Individual Investors (RIIs) allocation category.

To invest in shares issues in a follow-on public offer, you need a PAN card and an active DEMAT account. Here's how you can open a DEMAT account.

1. Pick a depository participant (DP) of your choice, and enter their website.

2. Fill in your basic details, such as your name, mobile number, date of birth and email.

3. Upload your documentation, such as your PAN card and address proof.

4. Wait for the verification process, after which you can start investing.

In conclusion

A follow-on public offer benefits the company that issues it and the investors looking forward to securing shares. Before you apply for FPOs, take your time to understand how they work and the two types of FPOs that companies may issue. While follow-on public offers have a lower risk than initial public offers, do not forget that risk is still something to account for. This means that careful consideration applicable to other investment decisions applies to FPOs as well. This way, you can make the best of the FPO world while prioritizing your goals and interests. Keep an eye out for FPOs! They are undoubtedly lucrative opportunities for investors. 

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FAQs for follow-on public offering

1. What is FPO and IPO?

An FPO (Follow-on Public Offering) and IPO (Initial Public Offering) are ways for companies to raise capital from the public markets.

2. Which is better, FPO or IPO?

An FPO is generally safer for new investors who don't have market expertise. An IPO, on the other hand, is better for seasoned investors who understand company fundamentals.

3. How does FPO work?

FPO allows existing publicly traded companies to issue additional shares to raise funds from the market.

4. What is the full form of FPO?

FPO stands for Follow-on Public Offering.

5. Who can buy FPO?

Any investor who meets regulatory requirements can buy an FPO.