What is a follow-on public offering (FPO)?

A Follow-On Public Offering (FPO) is a process by which a company, that is already listed on the stock exchange, issues additional shares to the public. This allows the company to raise capital by selling more shares after its Initial Public Offering (IPO). The FPO can help the company fund various projects like expansion, debt reduction, or acquisitions, and it is typically used by established companies seeking further funding.

1. Types of FPO

There are two main types of Follow-On Public Offerings:

• Dilution FPO: In this type of offering, the company issues new shares, which leads to the dilution of existing shareholders' stake. This helps the company raise capital by increasing its equity base.
• Non-Dilution FPO: Here, existing shareholders, such as promoters or major investors, sell their shares to raise funds. There is no increase in the number of shares, so existing shareholders' stakes remain the same.

2. Purpose of a Follow-On Public Offering

Companies typically use FPOs for the following reasons:

• Expansion and Growth: A company may use the raised funds to finance its expansion plans, such as entering new markets, developing new products, or increasing production capacity.
• Debt Reduction: Companies with high debt may use the proceeds from an FPO to reduce their liabilities and improve their financial health.
• Acquisitions and Investments: Companies may use FPO proceeds to acquire other businesses or invest in strategic assets.

3. Difference Between IPO and FPO

The primary difference between an IPO (Initial Public Offering) and an FPO (Follow-On Public Offering) lies in their timing and purpose:

• IPO: An IPO is the first time a company offers its shares to the public. It is used to raise capital and is typically used by companies that are not yet publicly listed.
• FPO: An FPO occurs after the company has already gone public through an IPO. It is a way to raise additional funds by issuing more shares or selling existing ones.

4. Risks Associated with FPOs

While FPOs can provide an opportunity for investors to buy shares in a company, they also come with risks:

• Market Volatility: The stock price may fluctuate due to market conditions, and the value of the new shares may drop post-listing.
• Share Dilution: If the FPO involves the issuance of new shares, existing shareholders may see their stakes diluted, which can lead to a decrease in their ownership percentage and voting power.
• Underperformance: Companies might not always use the raised funds effectively, which can lead to underperformance in the stock price.

5. Conclusion

A Follow-On Public Offering (FPO) can be a valuable tool for a company looking to raise capital for growth, acquisitions, or debt reduction. However, investors should carefully consider the risks, including share dilution and market volatility, before participating. It's essential to evaluate the company's financial health, future prospects, and the purpose of the offering before making any investment decisions.