Things to Know About FPO: Who is Eligible for FPO?

Many investors all around the globe always wait for a big corporation to go public and issue an IPO. This way, they can hold the shares of a prospective business giant as early as possible. For example, when Tesla Inc. went public and issued an IPO in June 2010, its shares were priced at $17. Today, the price of each Tesla share is $178.

But don’t be so hooked on the IPOs because they only come once for each company. Instead, you should focus on another offering— FPO. It can help you own the shares of any public company at a lower price with minimal risk. So, what exactly is an FPO, and why should you invest in it? Let’s find out!

What is a Follow-on Public Offer (FPO)?

Follow-on Public Offer is made when a company that has already gone public decides to sell more of its stock to the general public. An FPO is typically offered by a company to raise additional capital to deal with debt, expand business operations, or for other reasons.

To issue a follow-on public offering, the business must already be a public company that has gone through an IPO. Also, the shares offered during an FPO have to be available to the general public. It should not be limited to the current shareholders.

Why Do Companies Make a Follow-on Public Offering?

A public company offers a follow-on public offering for the following reasons:

• If a company has a large amount of debt, it might use a follow-on public offering to sell some of its shares to settle some or all of the debts. Too much debt can severely limit a company’s business operations.
• Sometimes, a company can fail to raise enough capital via an IPO to expand its business. To raise more capital, the company executives might decide to offer additional shares via an FPO.
• Maintaining a proper debt-to-value ratio is important for a corporation’s capital structure. A business may choose to achieve this by raising equity by issuing new shares to the public.
• A follow-on public offering allows a corporation to raise capital without incurring further debt. It can help the company have enough funds to start: 1) new projects, 2) go through a series of acquisitions, or 3) simply grow its business operation.

Types of FPOs

FPOs can be divided into two types depending on how the new shareholders gain ownership of their shares.

1. Diluted FPO

The diluted FPO is a kind of follow-on public offering where a company issues new shares to the general public to raise funds. The total number of outstanding shares increases during this kind of public offering, slowly reducing the earnings per share. Capital raised through diluted FPO normally changes a business’s capital structure or decreases its corporate debt.

2. Non-diluted FPO

A follow-on public offering will be called a non-diluted FPO if one or more existing shareholders of a company sell their shares to the general public. All the capital gained from the sale goes to the shareholders, and the company doesn’t get any share of it. So, the shareholders suffer almost no monetary loss. In most cases, these shareholders are the founders, board of directors, pre-IPO investors, or promoters of the company.

Since the corporation doesn’t issue any new shares for this kind of follow-on public offer, the actual earnings per share value does not change. Non-diluted FPOs are also known as “second-market offerings.” What’s more, this type of FPO doesn’t benefit the company in any way; it just changes the ownership pattern of the shares.

How to Apply for an FPO?

The process to apply for the FPOs is quite similar to the IPO application process. You need to apply through the Retail Individual Investors allocation. To buy the shares offered in an FPO, you must be over 18 years old, have a PAN card, and possess a Demat account that helps investors trade stocks. 

You can now buy the shares of the companies that have follow-on public offerings on the stock exchange through

• a broker, or
• a bank’s ASBA (Application Supported by Blocked Account) services.

Reasons to Invest in FPOs

Here are a few reasons why you should invest in FPO shares:

• A company issuing follow-on public offering shares has already gone through an IPO. So, you will already have a better idea of the company’s business practices, management, etc. As an investor, you can benefit from also having data on the company’s 1) stock performance, 2) earning reports, and 3) a few more analytical data. 
• If you engage in arbitrage trading, you can buy the FPO shares at a low price and sell them at a higher price later to earn profits. 
• The price of FPO shares is usually on the lower side than the same company share that is being traded in the stock market. So, you can buy them now and sell them in the secondary market to earn an instant profit without taking any risk. 
• The risk level of the FPO shares is significantly lower than the shares issued during an IPO. You can simply assess the risk factors of the issued share to determine if it is worthwhile to invest in the company. 

Final Words

As you can see, investing in an FPO is a lot less risky than investing in an IPO since you are already familiar with the company. Because the company has already gone through its IPO, you can easily check the company’s general financial report to see how it’s performing financially. You can also see how a corporation’s shares are performing in the stock market.

This allows you to thoroughly investigate the company to get the most out of your FPO investments while reducing the risk factor. 

Do you want to learn more about corporate finances? Visit Piramal Finance to learn more about corporate financing and different business finance options.