Whether you’re a beginner or an individual with a bit of experience in the share market, you must have heard of or maybe even invested in Initial Public Offerings of companies.
An IPO is the process through which a company issues its shares to the general public for the first time. It is one of the most lucrative and easiest ways for companies to raise funds.
But can companies only raise funds through the share market once in their lifetime? Definitely not. Here’s where the concept of a Follow-On Public Offer (FPO) comes into the picture. Wondering what it is? Continue reading to find out everything about this concept.
A Follow-On Public Offering is the process through which a company can issue its shares once again to the public to raise funds through the sale. This is precisely why such an offer is known as a ‘Follow-On’ issue. Since raising funds through the sale of its shares are the most cost-effective ways to gain access to funding, companies that already have their shares listed can opt to issue an FPO.
Now that you’ve gotten an idea of what an FPO is, let’s take a quick look at some of the crucial things that you would need to be aware of with respect to this concept.
There are two different kinds of FPOs that companies can opt to issue - dilutive FPOs and non-dilutive FPOs. In a dilutive FPO, the company issues more shares to the investors, which has the effect of diluting the control of the company.
In a non-dilutive FPO, however, the control of the company isn’t diluted since no new shares are issued to the investors. Instead, the shares that are already in existence are sold to investors by shareholders. This is akin to the Offer for Sale (OFS) component of an upcoming IPO.
The funds that are generated through a non-dilutive FPO don’t go to the company since the company isn’t the one that’s selling the shares to the public, rather it is the shareholders of the company.
Just like with an upcoming IPO, almost anyone can apply for an FPO. This includes new investors looking to purchase the shares of a company as well as existing shareholders wanting to increase their ownership within the entity.
When it comes to the pricing of an upcoming IPO, it is a fixed price issue or the price is set through a book building process. In the case of a Follow-On Public Offering, the price discovery mechanism is more or less similar to an IPO. However, the only difference is that the price of a follow-on issue is almost always lower than that prevailing market price. This is done so that the shares appear more attractive to investors.
The risk of investing in an FPO is far lower compared to an IPO. This is because of the fact that a follow-on offer can be issued only by companies that have already been in the market for a long time. And gaining information related to the company’s financials and historical share price movements are far easier as well.
With this, you must now be aware of what a Follow-On Public Offering is. Now, whether you’re planning to invest in an upcoming IPO or an FPO, possessing a demat account is a mandatory prerequisite. Without one, you cannot invest in any of the above public issues. Visit the website of Motilal Oswal right away to open a demat account for free within a few minutes.