What is FPO?

The full form of FPO is Follow on Public Offer. The FPO is a process in which a company listed in the stock exchange issues new shares to its existing or new shareholders. Now the question arises, how it is different from the IPO, i.e., initial public offering?

IPO is the process in which a company issues shares to the public first time to raise funds for the expansion or growth of its business. The FPO is different from the IPO in the sense that it is not the first time, a company issues shares to the public.

Then why a company brings FPO? A company brings FPO to expand its equity base. There may be two main reasons performing the FPO by a company:

The company wants to reduce its debt to improve its debt-to-value ratio.

The company intends to raise additional capital for its business, either to expand its existing business or for the new projects.

Different Between IPO and FPO

The difference between the IPO and FPO is described in the table below:

Types of FPO

There are mainly two types of FPOs which are mentioned below:

Dilutive FPO

In the dilutive FPO, the company issues additional shares with the same price value of existing shares. It means that the number of shares increase but the market capital of the company remains same. It results in the decrease in earnings per share and ultimately decrease in the value of shares. In this FPO, the money goes to the company which may be used to reduce the debt of the company or to expand the business or the company.

Non- Dilutive FPO

Non- dilutive FPO means that the shareholders of the company sell their private shares to the public. It means that the money goes to the individual shareholders and not to the company. In this type of FPO, the earnings per share is not effected. Non- dilutive FPO is also known as market offerings.

It is important to note that if the company wants to raise capital to expand its business or to reduce its debt, then this purpose is fulfilled by conducting a dilutive FPO where new shares are offered.

At-the-Market FPO

This process enables the company to raise funds based on the real time price of the shares. If the company issuing the fresh shares through IPO is not satisfied with the price of the shares, it can pull out from offering the shares to the public. It is also called controlled equity distribution as it enables the company to sell its share in the secondary market at the current market price of the shares.

Is it Beneficial to Subscribe for a FPO?

FPOs are less risky as the investors have access to the historical data and the track record of the company. The FPOs offer advantage to the investors as compared to the IPOs because the investors have an idea about the management of the company, business principles, and track record of the company and hence they can predict the future growth of the company easily. Several investors are interested in the FPOs since it provides them an opportunity to buy the shares at discounted price and sell them in the market at premium price later on. Hence it is a good opportunity to make money for the investors.

Examples of FPO

There are many companies which have used FPO to raise capital for their business. Some examples of these companies are Tata Steel Ltd., Engineers India Ltd., Power Finance Corporation Ltd., Power Grid Corporation of India, etc. Indian government also uses FPOs to disinvest its stake in government held businesses.

Google also used FPO to sell its 14,159,265 shares of Class A common stock in 2005 at a price of $295.00 per share.

After the IPO, Tesla additionally issued more shares many times. They issued 5,300,000 new shares of common stock in 2011, while in 2012, they issued 4,344,930 new shares of common stock. They announced an offering of stock for $2 billion at the start of 2020. They announced the second offering of $5 billion in equity in December 2020.

How to Apply for a FPO?

The FPO can be applied in the similar way as the IPO is applied. It is applied in the Retail Individual Investors (RIIs) allocation. To apply for an FPO you need to be of minimum 18 years of age and you must have a PAN card and a DMAT account. Traders can purchase shares of a company on the stock exchange where it is listed through a broker.

Conclusion

The FPO is a process in which a company listed in the stock exchange issues new shares to its existing or new shareholders. If the company wants to reduce its debt to improve its debt-to-value ratio or it intends to raise additional capital for its business, either to expand its existing business or for the new projects, the FPO may be a good method for the above purposes.

Investing in FPO can be advantageous to the investors as the investors have access to historical data and previous track record of the company. The FPOs are less risky as compared to the IPOs as the companies are known to the investors and the potential growth of the company can be predicted by analyzing the historical data and previous track record of the company. Several investors are interested in the FPOs since it provides them an opportunity to buy the shares at discounted price and sell them in the market at premium price later on. Hence it is a good opportunity to make money for the investors.

Also read: Is Investing in an IPO a Right Choice?