What is FPO and How Does it Work?
An FPO (Follow-On Public Offer) is a fresh issue of shares by a listed company. It comes after an IPO (Initial Public Offering) when a company’s shares are listed for the first time on a stock exchange. There is a significant difference between an FPO and an IPO. Companies usually announce an FPO to raise fresh equity or bring down their debt. Public companies take advantage of FPO using an offer for subscription documents. All proceeds from such an offering belong to the company that issues the stock. However, a company must fulfill various regulations to execute an FPO. Let us start by understanding the different types of FPO.
Types of Follow-On Public Offerings
There are two main types of FPO based on the extent of dilution. Also, there is another route to go about getting an FPO. It is known as an “at-the-market” offering.
Diluted Follow-On Offering
This type of offering occurs when a company issues additional shares to raise funds. These shares are offered to the public for subscription. In this type of offering, the number of shares increases. This leads to a decrease in the earnings per share (EPS). The funds received through an FPO are used to reduce the company’s debt. They may also be used to alter the capital structure of the company. From a long-term perspective, the additional cash influx benefits the company and the shares.
Non-Diluted Follow-On Offering
In this case, the holders of existing shares bring their stock of privately-held shares to the public. Any proceeds from the sale of such shares go to the holders who place the shares on the open market. Generally, such shares are offered by the founders of the company. Or, company board members may come forward to offer such shares. In this case, since no new stock is offered, there is no effect on the EPS.
Another way to create an FPO is by using an at-the-market offering (ATM). A company can raise the desired capital with this method. Another name for such an offering is controlled equity distribution. “This is because shares can be sold at prevailing prices in the secondary stock market.
Raising additional funds through an FPO has many advantages for a company. The proceeds from such an issue can help a company pay off its debt. Consequently, it will help them improve their debt-to-value ratio. A company can even use such funds to finance different growth projects.
Why Does a Company Issue an FPO and How Does it Work?
The purpose of issuing an FPO is to raise fresh capital. Every company requires capital to conduct its operations. Additionally, capital is also needed to finance the purchase of various assets, expand plans, and pay off liabilities. After launching an IPO, a company can raise an additional round of funds from the public through an FPO. This is done by offering new shares to the general public, which generates money for the company.
From a financial standpoint, the issue price of an FPO is generally lower than the prevailing market price of a share. The idea behind such pricing is to attract as many subscribers for the share as possible. The listed shares of the company face lower demand in the market. Due to this, their market price falls. Their price eventually converges on the issue price of the FPO.
There are many factors that determine the success of an FPO. Here are a few examples:
- Profitability of the company
- Sentiments in the market and among investors
- Current trends in the market
- Potential for growth for the company
From the perspective of an investor, an FPO is far more beneficial. As an investor, you can understand the company’s management. Having established itself, the company is an example of its business practices and growth prospects. Thus, if you are willing to invest your money in the company, an FPO is a safe path for you. A publicly traded company easily provides the historical reference needed to estimate its earnings report. Also, you can check the company’s performance in the stock market with reliable data to bank upon. So, if you were keen on investing in a company but were holding back due to uncertainty, a Follow-on Public Offer will still give you a chance.
An FPO works simply. A company, which is already listed on the stock market, decides that it wants to raise new capital. If they have already raised funds from the public, this subsequent round will be termed an FPO. The company will need to file draft documents with the registrar of companies and issue a prospectus. Additionally, it will have to comply with any legal requirements of an FPO. After obtaining clearance, they can offer shares to the general public. The public can subscribe to the company’s shares at discounted prices during the offer period. It is how FPO works.
As an investor, you can benefit by subscribing to an FPO. So, now you must have understood how FPO and IPO are different. Also, it is clear how FPO works and why it can benefit investors.
Conclusion
So, an FPO is a method to raise funds from the public. There are two basic types of FPO. An investor can build confidence in a company by monitoring its performance. Later, they can apply to be a shareholder through the FPO. If you want more knowledge about an FPO or IPO, check out Piramal Finance. It is a premier destination for all types of financial products. You can explore the website to understand more about equity and debt and how companies structure their capital after raising funds through an FPO.