Investment word of the day: Follow-on public offering — what is FPO and how is it different from IPO?

Investment word of the day: A follow-on public offering (FPO) allows a company already listed on the stock exchange to issue shares to investors to raise capital. It is the process through which companies that have already raised money through an initial public offering (IPO) issue additional shares for more funds.

How does Sebi define FPO?

The market regulator has defined follow-on public offering as follows: “When an already listed company makes either a fresh issue of shares or convertible securities to the public or an offer for sale to the public, it is called an FPO.”

Types of FPO

There are two types of follow-on public offerings — dilutive FPO and non-dilutive FPO.

• Dilutive FPO: When the issue of new shares increases the number of outstanding shares of the company, it is termed as dilutive FPO. This impacts the earnings per share (EPS) as the total number of shares increases, while the value of the company remains the same.
• Non-dilutive FPO: A non-dilutive FPO is when the issue of additional shares does not increase the number of shares in the company. Simply put, it is a situation in which stockholders sell the existing shares in the market. It typically changes the shareholding pattern rather than the total value of the company.

How is FPO different from IPO?

While an FPO relates to the issue of additional shares of a company already listed on the stock exchanges, an IPO is the process by which a private firm offers its shares for the first time. An IPO introduces new shares in the market, raising capital from the public for the first time. Meanwhile, an FPO issues additional or existing shares, providing additional capital to an already listed firm.

Investors often opt for FPOs as they are considered to be a less risky option compared to IPO. They can analyse the data from the past performance of the company in the share market and make investments accordingly. However, it must be noted that the profitability of investing in an FPO may vary from firm to firm based on other key financial metrics.

Potential drawbacks of FPO

Issuing an FPO can lead to dilution of stock ownership, especially in the case of a dilutive FPO, where offering additional shares can impact ownership percentage and earnings per share for existing shareholders. Additionally, an FPO is also subject to market volatility, and its profitability majorly depends on prevailing market conditions.

Disclaimer: This article is for informational purposes only and does not constitute financial advice; please consult a qualified financial advisor before making any financial decisions.