The stock market is filled with various financial terms and concepts that investors must understand. One such term is FPO, which stands for Follow-on Public Offer. An FPO is a method used by publicly listed companies to raise additional capital by issuing new shares to investors. This topic explores the full meaning of FPO, its types, advantages, and how it differs from an Initial Public Offering (IPO).
What is an FPO?
Definition of FPO
A Follow-on Public Offer (FPO) is the process by which a company that is already listed on a stock exchange issues additional shares to investors. Unlike an Initial Public Offering (IPO), where a company offers its shares to the public for the first time, an FPO is conducted by companies that are already publicly traded.
Purpose of an FPO
Companies use FPOs for various reasons, including:
- Raising capital for expansion and growth
- Paying off existing debts
- Funding acquisitions or mergers
- Strengthening their financial position
Types of FPOs
There are two main types of Follow-on Public Offers:
1. Dilutive FPO
In a dilutive FPO, the company issues new shares, which increases the total number of shares available in the market. While this helps raise capital, it also reduces the earnings per share (EPS) since the total outstanding shares increase.
2. Non-Dilutive FPO
A non-dilutive FPO occurs when existing shareholders (such as company insiders or early investors) sell their shares to the public. Since no new shares are issued, there is no dilution of existing shareholders’ stakes. The main objective here is to provide liquidity to early investors.
FPO vs IPO: Key Differences
Many investors confuse an FPO with an IPO, but they serve different purposes. Here’s how they differ:
| Factor | IPO (Initial Public Offering) | FPO (Follow-on Public Offer) |
|---|---|---|
| Definition | First-time offering of shares to the public | Additional share offering by a listed company |
| Company Type | Private company going public | Already publicly listed company |
| Purpose | Raise capital for the first time | Raise additional funds |
| Investor Risk | Higher risk, as the company has no trading history | Lower risk, as the company has market performance history |
Advantages of Investing in an FPO
1. Reduced Risk for Investors
Since FPOs are offered by already listed companies, investors can analyze the company’s past performance before investing, unlike IPOs, where financial history is limited.
2. More Affordable Share Prices
FPOs often provide shares at a discount compared to the market price, making them attractive for investors.
3. Increased Liquidity
As more shares become available in the market, liquidity improves, making it easier to buy and sell shares.
4. Strengthened Financial Position of the Company
Funds raised through an FPO can help companies reduce debt and expand their operations, leading to long-term growth.
Risks Associated with FPOs
While FPOs have several benefits, investors should also consider potential risks:
1. Share Dilution
In a dilutive FPO, new shares increase the total number of shares outstanding, reducing the earnings per share (EPS), which may impact stock prices.
2. Market Perception
If an FPO is perceived as a sign of financial struggle, investors may react negatively, leading to a decline in stock prices.
3. Price Volatility
Stock prices can fluctuate significantly before and after an FPO, affecting short-term investors.
How to Invest in an FPO?
Investing in an FPO follows a process similar to buying stocks in the secondary market:
- Research the Company – Analyze financial statements, stock performance, and reasons for the FPO.
- Check the FPO Offer Price – Compare the offer price with the current market price to determine if it’s a good investment.
- Open a Trading Account – Investors need a Demat and trading account with a registered stockbroker.
- Apply for the FPO – Investors can apply through their broker or online platforms during the FPO period.
- Monitor Market Trends – Keeping track of stock movements and economic conditions can help make informed decisions.
A Follow-on Public Offer (FPO) is a valuable tool for companies to raise additional funds after an IPO. It provides investors with an opportunity to buy shares in an established company at a potentially lower price. While FPOs offer several advantages, such as lower risk and increased liquidity, they also come with risks like share dilution and price fluctuations. Investors should conduct thorough research before participating in an FPO to ensure they make the right financial decisions.