Many people are aware of the term Initial Public Offering (IPO), which is one of the ways of raising funds by listing the company on the stock market for the first time. However, not many may know that there is also another way of seeking capital from the public which is known as the Follow On Public Offer (FPO). Now, the question arises here what is FPO and its importance? Why there is a need to come up with the FPO? Let’s try to break down the Follow On Public Offer and also know how it is different from an IPO.
Follow on Public Offer (FPO)
FPO also was known as secondary offering essentially refers to issuing new or additional shares again by a public company to the investors or existing shareholders, which is already listed on the stock exchange and has gone through the process of issuing IPOs.
Need for FPO
It cannot be denied that a company requirements fund to establish itself in the market. Even if the company is very well established, then it may require additional funds to run their day-to-day business operations smoothly, for further expansion or pay off debt. Oftentimes, a company may find it hard or challenging to acquire funds from the banks because of bad cash flow, inadequate collateral or whatever the reasons may be. In that case, issuing shares to the public is one of the best means to raise capital and this is where the FPO comes into the picture. Moreover, there are certain rules and regulations that a company must keep into the consideration before coming up with the FPO. For example, you cannot issue FPO before getting listed on the stock exchange.
Difference Between FPO and IPO
Most of the people tend to consider the FPO and IPO as same but there is a big difference between the two terms. The prominent points of differences are listed below:
- Definition: If any company decides to go public by selling its stocks for the first time, then it is known as the Initial Public Offering (IPO). On the other hand, FPO means issuing shares by a public company which is already established in the market and listed on the stock exchange.
- Type of Public Issue of Shares: It is the first public issue of the shares by the company, whereas, FPO can be second, third or fourth public issue of shares.
- Listing Status: An IPO is issued by the company before it is listed in the stock exchange. On the other hand, FPO is issued by a listed company.
Risks Involved in IPO & FPO
Whether you believe it or not but even IPOs have their own risks. For instance, when a company applied for IPO is to “going public” there are many uncertainties regarding the past performance of the company. It is because until then the company was privately held and had a handful of investors as its shareholders. Plus, during the time of IPO, the company represents its balanced sheets in public, which could possibly be manipulated to attract more investors towards it. Thus, IPOs are considered to be risky because an individual has no idea what will happen to the company in the near future. In the case of FPOs, they are less risky because an investor already has an idea about the future prospects of the company which has already “Publically listed” in the exchange. So, not entirely but individuals can get the idea of the company’s performance after being “Listed in Public” and how its shares are performing in the market on the basis of past track records and balanced sheets revealed by the company on quarter basis. But, you can’t be so sure if the company who had performed well before will surely perform in distant future after the FPO.
Types of FPO
There are basically two types of FPO, which are:
- Dilutive Offering: Here, the ownership percentage of the board of directors of the company is diluted. The shares are purchased from the owners of the company. In order to issue more shares, the boards of directors raise the share float. Floating of the shares is essentially the total number of outstanding shares that are issued to the public for sale or investment.
- Non-Dilutive Offering: In this type of FPO, the directors of the company to agree to sell their privately held shares. It is non-dilutive because no additional shares are being sold in the market.
Nowadays, the public offering has become extremely common and if you are formulating any plans to enter into the world of stock market and invest your hard-earned money, then it would be extremely beneficial to have some primary knowledge of an IPO and FPO.
Hope you enjoyed reading the article. Leave some comments below if you have any questions regarding FPO. We will be happy to help you.