A Follow-on Public Offering or FPO is a stock exchange mechanism for issuing shares to investors. It is a method of acquiring extra equity money to help a firm run its operations or carry out its expansion.
They are issued by companies that are already listed on the stock exchange to sell the stakes of the company for a number of organizational goals such as to cover losses and/or debts.
For instance, an already listed company aspires to raise more funds by selling additional stakes. To accomplish this, the company would employ underwriters to study the financial aspects and to decide the issue price of the shares. Then it will file an application with the SEBI and if all the eligibility criteria are fulfilled, the shares can be opened in the market for investors.
How is FPO different from an IPO?
IPOs are the first issues of the stakes of a company whereas FPOs are generally the additional issues. When a company issues Follow-on public offerings ,the probability of investors investing is much more because it is already listed on the stock exchange and the investors have an idea about the company.
However, initial public offerings are issued when a company goes public for the first time and therefore the investors might not know beforehand about the financial prospects of the company.
Types of FPO
There are generally two types of FPO.
Dilutive offering
A dilutive FPO occurs when a firm wishes to raise more money by releasing additional shares. This is done for a number of reasons which include to pay off the loans. In the situation of a dilutive FPO, however, a company's valuation remains constant, leading to a drop in the company's per-share earnings.
Non-dilutive offering
In Non- dilutive offering, the company's founders or major shareholders offer some of their stock to the general public. The money goes to the person who is trading the shares, not the firm. As a result, the company's profits per share are unchanged. They are also known as secondary market offerings.
The FPOs are considered to be more reliable but still the investors ought to carry out their research about the company before buying the shares.