What Is a Follow-On Public Offer and How Does It Work?
A follow-on public offer (FPO) is when a publicly-traded firm that has already been listed on a stock market issues shares to the general public. Companies might use a follow-on public offer to obtain extra capital for a variety of reasons, including expanding their business operations, reducing debt, and so on. However, the company must have already gone public through an initial public offering (IPO), in which it sells shares to the general public for the first time. Also, the shares issued through the FPO must be open to the whole public, not only current stockholders. The company's performance determines the share price during the initial public offering (IPO), and the company hopes to attain the desired price per share during the IPO listing. The share price for FPO, on the other hand, is market-driven because the stock is already traded on the stock exchange. As a result, the investor can better grasp the company's value before making a purchase. In addition, the price of follow-on public shares is often lower than the current trading price. The corporation may seek an FPO for a variety of reasons, including the need for finances to pay down debt or make an acquisition. Existing shareholders may be interested in cashing out their existing interests in some situations. Companies in other cases wish to raise funds in order to refinance their debt at cheap interest rates. As a result, before applying for an FPO, investors must be careful and assess the reasons behind the company's offering. Before you start investing or trading, we recommended going with one of the best brokerage firms in the country like Zebu. As a top broker in share market we have created one of the best stock trading platforms for you to use and invest. Types of Follow On Public Offers Depending on how ownership is transferred to new shareholders, there are two sorts of follow-on public offers. FPO diluted The first type of FPO is a diluted FPO, in which the corporation issues more new shares. As a result, the number of outstanding shares of the corporation rises, lowering earnings per share. The money raised in this way is usually used to pay down debt or restructure the capital structure of a company. FPO non-diluted When existing shareholders of a corporation sell their shares to the public, it is known as a non-diluted FPO. Rather than going to the corporation, the revenues of the sale go to the shareholders. As a result, the shareholder incurs no financial loss. Founders, promoters, board of directors, and pre-IPO investors are typically among these shareholders. The earnings per share stay steady because no new shares are issued and existing shares are offered for sale. Secondary market offerings are another name for non-diluted FPO. Furthermore, this sort of FPO has no benefits for the company and is just utilised to change the ownership structure of shares. What Motivates Businesses to Make a Follow-On Public Offer? In most cases, firms issue extra shares in order to inject more capital into the company. The following are some of the reasons why a corporation might need to raise money: If the company's debts are too significant, the revenues from the sale may be used to pay down the debt. This allows them to escape debt covenants that may limit their ability to operate their business. To grow its existing equity shares and rebalance its capital structure while maintaining the ideal debt to equity ratio, a corporation may issue more shares. When an initial public offering (IPO) fails to attract the funds required for the company's expansion ambitions, a follow-on public offering is used to issue more shares. Finally, rather than accumulating debt, a firm decides to raise cash by issuing shares, which can be useful for financing new initiatives, acquisitions, or commercial operations. The Benefits of Investing in a Follow-On Public Offer Investing in an FPO can be more beneficial to investors than investing in an IPO since investors have a better understanding of the firm, its management, and business practises. Investors can also consult historical stock market performance, earnings reports, and a wealth of other information. The share prices are slightly lower than those traded on the stock market when corporations issue shares through FPO. This allows investors to make a risk-free return by purchasing and reselling shares on the secondary market. Many investors engage in arbitrage trading, which involves purchasing shares in an FPO at a cheap price and selling them at a higher price on the market to profit. An FPO has a significantly lesser risk than an IPO. As a result, just like any other investment, FPO needs investors to do their homework on the firm and its past success. It is, however, considerably easier to investigate and is better suited to investors who have a thorough grasp of risk. Also, investors will be able to purchase company shares at a reduced price as a result of this arrangement. As one of the top brokers in share market we have created the best stock trading platform for you to invest in wisely. Our tool is designed to help investors and traders alike to analyse a company with a wide range of indicators and screeners as per your strategy. As one of the best brokerage firms in the country, we invite you to open a trading and investment account with us.