What Is a Follow-on Public Offering (FPO)?

Companies often have multiple avenues to raise capital. One of the more prominent mechanisms is through an initial public offering (IPO), where companies sell equity shares to the public in exchange for funds. 

However, an IPO isn't the only way to raise funds from the stock market. After going public, companies can issue additional shares through a follow-on public offering (FPO). This article delves into what an FPO is, how it works, why companies opt for it, and the different types of follow-on public offerings. 

What is a Follow-On Public Offering (FPO)?

A follow-on public offering (FPO) is a mechanism through which a company that is already listed on a stock exchange raises more funds by issuing additional shares to the public. All public issues that take place after an IPO are termed follow-on public offerings. 

An FPO is an effective fundraising tool for companies looking to expand operations, reduce debt, or fund other business activities without having to rely solely on debt financing. One of the most unique characteristics of FPO is that there is no limit to the number of follow-up issues a company can announce.   

Follow-On Public Offering: An Example

To better understand how an FPO works, let us consider a hypothetical example involving a fictional company, ABC Limited.

ABC Limited completed its initial public offering two years ago and is currently listed on the National Stock Exchange (NSE). Through the IPO, the company issued 25 lakh shares at Rs. 100 each, raising Rs. 25 crore in the process. The IPO proceeds were used to aggressively expand its operations. 

The company has since experienced significant growth and now needs additional capital, to the tune of Rs. 50 crores, to fund the research and development of a new revolutionary product line and expand its market reach. 

Now, how will the company get access to Rs. 50 crores without resorting to borrowing funds from the banks or issuing debt instruments? Through a follow-on public offering, of course. The company decided to go ahead with an FPO, where it plans to issue 25 lakh equity shares at Rs. 200 per share. If successful, the company can raise Rs. 50 crore and use it to support its growth initiatives.       

What are the Different Types of Follow-On Public Offerings? 

There are two primary types of FPOs: dilutive offerings and non-dilutive offerings. Each type has its own distinct characteristics and implications for the company and its shareholders. Let us explore them in detail. 

• Dilutive Follow-On Public Offering

In a dilutive FPO, a company issues newly created shares to the public in exchange for funds. Since new shares are created, the total number of outstanding shares increases. This dilutes the voting rights and control that the existing shareholders have over the company. 

Although this dilution of ownership is often considered a downside, it is offset by the potential benefits that the company stands to enjoy. For example, the issuing entity could use the capital raised via the public issue to fund growth and improve its long-term prospects. 

• Non-Dilutive Follow-On Public Offering  

In a non-dilutive FPO, existing shares held by the large shareholders of a company are sold to the public. Since no new shares are created, the total number of outstanding shares remains the same and does not dilute the ownership of existing shareholders. 

Non-dilutive FPOs allow insiders and large investors to sell a portion of their holdings, providing liquidity for them. The proceeds from a non-dilutive FPO do not go to the company but to the shareholders selling their shares to the public.  

Why Do Companies Opt for a Follow-On Public Offering? 

Companies choose to raise funds through FPOs due to the multitude of benefits they offer. Let us look at some of the key reasons. 

• To Raise Cost-Effective Capital 

Companies often require significant funds for expansion, research and development, acquisitions, and other business activities. Although debt financing is a viable option to get funds, it would increase the interest burden, leading to lower profitability. An FPO, meanwhile, offers a cost-effective way to raise these funds without incurring additional debt. 

• To Increase Market Liquidity 

A dilutive FPO can increase the company's total number of outstanding shares. With more shares available in the market, trading volume typically increases, making it easier for investors to buy and sell the stock. Greater liquidity can also attract institutional investors, who may prefer stocks with higher trading volumes.

• To Strengthen Their Balance Sheets

Many companies prefer to raise capital from a follow-on public offering and use the proceeds to pay off existing debt. This strengthens the balance sheet by lowering interest expenses and improving profitability. A stronger balance sheet can also enhance a company’s credit rating, making it easier and cheaper to borrow in the future.

• To Provide Investors With an Exit 

Companies often call for a non-dilutive FPO to provide its promoters, executives, venture capital funds, and early investors with a platform to sell their stake in the company. This allows these shareholders to realise some of their gains and diversify their investments without affecting the company's total number of outstanding shares.    

Conclusion

With this, you must now be aware of what an FPO is in the share market. A follow-on public offering is a useful tool for companies looking to raise capital after a successful IPO. If you are planning to invest in a company’s FPO, remember to read through the prospectus thoroughly. This will help you get to know the company better. Furthermore, it is also advisable to compare the IPO pricing with its current market price and true intrinsic value to determine whether the public issue is undervalued or overvalued.

The Research 360 platform, powered by Motilal Oswal, has a dedicated section for public issues, where you can track and get details about both open and upcoming FPOs and IPOs. In addition to this, the platform also has the tools to help you analyse the valuation of FPOs of existing listed companies. What’s more, you get all of these features and more for free when you sign up for the Research 360 platform.