Introduction
When a company is already listed on the stock exchange and its shares are being traded, then if the company issues new shares to the public, then this process is called Follow-on Public Offer (FPO). Whereas Initial public offering (IPO) comes when the company is listed on the stock exchange for the first time. In FPO, the company tries to raise funds by issuing additional shares which are used for the development of the company.
How Does an FPO Work?
Just read about what is FPO. Here a question must be coming in your mind that when a company is already listed in the stock exchange then why is it launching its new shares in the market. The answer to this is that funds are required to run any company and the need for funds also increases with time. Funds are needed for new projects, for expansion of the company, to repay any kind of loan or to increase working capital. The reason can be anything. Therefore, to meet all these needs, the company brings additional shares in the market.
The process of FPO is similar to IPO, wherein issuers are required to draft an offering document and allot shares to investors before listing on stock exchanges. The issue price for FPOs is mostly lower than the prevailing market price. This is done by the company to bring more and more subscribers to its issue.
Types of FPO
There are two main types of FPOs: Dilutive and Non-dilutive.
Dilutive FPO
Dilutive FPO occurs when the new offering of shares actually increases the number of outstanding shares of the company. The company board issues a new set of shares to be offered to the public. This is done by the FPO company to fund expansion activities or to pay off debts. As the number of shares increases, the earnings per share (EPS) decreases. The funds raised during an FPO are often allocated to reduce debt or change the capital structure of the company.
Non-dilutive FPO
When an investor who holds a large number of shares sells shares of a company, then those remaining shares are offered to the public for sale. Non-dilutive FPO, as the name suggests, such shares do not dilute the existing shareholding. These are those shares which are already available in the market. Such shares do not provide any material benefit to the company. Mostly it is used to change the shareholding ownership pattern.
All investments have some advantages and disadvantages. Let us know the advantages and disadvantages of investing in NFO.
Advantages of FPO
- 1. Quick Capital Raising: FPOs allow companies to raise capital quickly and efficiently.
- 2.Lower Costs: The costs associated with an FPO are generally lower compared to an Initial Public Offer (IPO).
- 3. Premium Issue: Companies have the ability to issue shares at a premium to the current market price.
- 4. Financial Improvement: FPOs can improve the financial position of the company.
- 5. Enhanced Public Image: It can enhance the public image of the company.
- 6. Investor Options: FPOs give investors more options to buy and sell.
Disadvantages of FPO
- 1. Dilution of Ownership: An FPO can lead to the dilution of ownership for existing shareholders.
- 2. Market Volatility: There can be potential market volatility due to the increased supply of shares.
- 3. Dilution of Earnings: As the number of shares increases, the earnings per share (EPS) may decrease.
- 4. Risk of Misutilization: The success of the FPO depends on how effectively the raised capital is utilized.
Conclusion
FPOs are a valuable tool for companies to raise additional capital and for investors to participate in the growth of a company they believe in. However, like all investments, FPOs carry risks and require careful analysis. Investors should thoroughly research the company and its financial performance before deciding to invest in an FPO.