A follow-on public offering, also known as a follow-on FPO, is a type of secondary public offering used to raise additional funds for a company. In a follow-on FPO, the existing stockholders of the company are allowed to purchase more shares of stock after the offering has closed—up to a maximum of 35% of the shares of the company. The remaining shares of the company, which are up for sale in the initial public offering, are sold to the public.
FPO stands for Follow-on Public Offers. These are public offers of securities by companies that are already trading on the stock market, and which are therefore subject to the usual rules and regulations regarding such offers.
Understand what the FPO is – The follow-up offer explained: IPOs have flooded the markets this year. But did you know that there is another type of IPO called an FPO? In this article, we will look at what an FPO is and what an IPO is in order to distinguish the two concepts. Read on to find out.
When starting a business, the entrepreneur raises funds from angel investors, venture capitalists, etc. But these raised funds are limited and can only advance the company up to a certain limit. But these accumulated resources are limited and can only advance the business up to a certain limit. Over time, the company will still need a lot of resources for significant expansion and growth. In this more important phase, the company turns to the public markets to raise funds.
In India, companies do this by listing on exchanges like the BSE and NSE, where the shares are then traded. But why should public investors invest in these companies?
They do this in exchange for an equity stake in the company, hoping that the company will continue to make constant and sufficient profits and will be worth much more in the future. This method of raising capital through public offerings can be divided into two types: IPOs and FPOs.
- What is an initial public offering?
- What is FPO?
- Difference between IPO and FPO (with example)
- Final thoughts
What is an initial public offering?
An initial public offering (IPO) is the process by which a company raises capital for the first time through a stock exchange listing. This is a very important source for raising significant funds for the Company’s expansion and growth needs.
In exchange for their money, public investors receive shares in the company. The performance of these shares depends on the results of the company and can be observed daily on the stock exchange.
What is FPO?
A follow-on public offering (FPO) occurs when a company that is already listed decides to raise funds again from the general public. That is why the OPS always follows the IPO.
So the two terms mean pretty much the same thing, the only difference being that an IPO is the first time a company raises money from the public. When the need arises and the same company decides to raise funds from the public again, this is known as an OPF.
There are two types of FPOs:
The difference between the types of FOPs is the manner in which ownership passes to the new shareholders.
1. Dilutive FPO
A dilutive FPO is one in which the promoters and existing shareholders raise funds in the market while keeping the value of the company at the same level. This in turn leads to lower stock prices and other parameters such as. B. EPS (earnings per share), based on the amount of funds raised in the market.
In effect, the number of shares in the company increases while the total value of the company remains unchanged.
2. Non-dilutive FPO
In a non-dilutive OPF, the major shareholders include. B. promoters, funds by selling part of the stake they already hold in the company. Here the number of shares remains unchanged, unlike what we saw in the dilutive OPF.
This method has no direct impact on the company’s share price and earnings per share.
Difference between IPO and FPO (with example)
When you first encounter these terms, it can be difficult to understand their meaning. Let’s understand it better with an example.
Let’s say Mr. Stark has a new business idea that he thinks could be the next big thing. But he has only 10 lakhs capital from his personal assets to finance the venture, while he needs 20 lakhs in total.
Here comes Mr. Angel investor, who decides to invest in Mr. Stark’s company because he too believes Stark is up to something. Sir, I want to thank you for your support. Stark persuaded him to invest in the company by giving him a 40% stake.
With the proceeds, Mr. Stark established Big Ltd. in Mumbai. The business takes off and becomes a success in the country over the next 5 years. But Mr. Stark is now not only interested in the state, but he also wants to take on neighbouring states. But the resources at its disposal and those generated by the company are far from adequate.
This time Mr. Stark decided to make a public offer. As this is the first time Big Ltd is raising funds from the public, the issue is known as an IPO. Mr Stark managed to get crowns by selling his 20 % share in the company. Its share in the company is currently 40%.
The company is listed on the stock exchange and starts trading at Rs. 10.
After 5 years, the shares of Big Ltd are worth Rs 20 lakh thanks to its success. Big Ltd. again needs funding as it plans to expand to the rest of the country. Once again, the company chose the public road.
This time, when the company raises funds from the public, it is called an OPF. But Mr. Stark gets these funds to the public by offering them a 20% stake in the company. Since Mr. Stark offered his shares to the public, the offering now qualifies as a non-dilutive FPO. The stock is still trading at Rs 20 lakh after FPO.
Big Ltd. has been around for 20 years. The company now plans to expand globally. A total of 1 lakh shares of the company are available at Rs. 30. The company plans to raise funds again through a public issue, but this time by launching 1 lakh shares in the market.
Such a public offer is called a dilutive public offer. Here the shares are worth 15 lakhs after a successful FPO because no one sold their share but chose to be diluted in the IPO.
If we look at the two concepts from an investor’s perspective, they have different returns and inherently different risks.
An IPO is the riskier of the two options, as investors must rely solely on the information disclosed by the company through the SEBI. But an IPO also offers higher returns because it takes place early in a company’s existence.
On the other hand, OPFs are less risky than IPOs. Indeed, investors can easily evaluate the company’s past performance here, as all the data is now publicly available. However, profitability also reduces risk.
That’s all there is to this post on IPOs and FPOs. Tell us what you think in the comments below. Have fun investing!
Frequently Asked Questions
Is a follow on offering good or bad?
A follow on offering is good because it gives investors the option to buy more shares in the company.
What is difference between IPO and FPO?
An IPO is an initial public offering, while an FPO is a follow-on public offering.