What is FPO?
The full form FPO is Follow-on Public Offer, which is made by an issuer who has already made an IPO in the past and now adds further issue of security to the public. When a company gets listed on the stock exchange for the first time, an IPO can be raised for the purpose of fund collecting from the public by issuing them shares of the company. Further, for any reason, if the company again wants to raise financing from the public, the share they issue this time to the public is known as Follow-on Public Offer (FPO).
Types of FPO
There are two types of FPO:
- Dilutive shares: This refers to the addition of new shares to the market in order to raise a FPO. It leads to dilution of their stake and the earning per share gets reduced.
- Non- dilutive: Any pre-existing private shares such as shares holded by owners, investors etc. are now being sold to the public. Since there is no dilution, the earning per share remains the same in this FPO.
When do Companies Raise a FPO?
It is a common method followed by the companies, when in need of huge funds for:
- Expansion of business- When entering new markets or picking up new projects.
- Product development- Introduction of new products in the company or refurbishment of any existing product.
- Acquisition- While financing acquisitions of another company, product or assets.
- Debt repayment- To pay off any outstanding debt and improve the current financial health of the company.
- Capital restructure- The company wants to change their capital structure from debt to equity structure and requires funds to pay any existing debt.
Points to Know for FPO
- Pricing- If the company is introducing new shares in the market, its price is likely to be affected by market conditions, demand and supply, company’s valuation etc. Before the raise of FPO, the final prospectus discloses the share pricing.
- Allocation: Under FPO, shares can be allotted on various basis.
- Proportionate basis: Where the existing shareholders are also allowed to purchase new shares depending on their current holdings.
- Discretionary basis: When allocation of shares is at the discretion of the company or else the underwriters.
FPO is considered as a tool for companies to raise additional capital from the public whenever required for any valid reason. It is good to understand the meaning, types and essentials before investing in a FPO and participating in such offerings. FPO facilitates long term growth for the company and gives investors an opportunity to expand their business or create a strong financial position of the company.
Author
