Follow on Public Offering

What is a Follow on Public Offering?

Follow on Public Offering (FPO), also known as a seasoned equity offering, is the method to issue raise capital by offering additional equity or preference shares after raising funds through Initial Public Offer.

Pre-Requisites of an FPO

There are certain prerequisites for the new offering to be categorized as a follow-on Public offering; one such prerequisite is that it should be offered to the general public, i.e. issued in the open market, because if offered to existing shareholders it is known as a Rights issue or a Bonus issueBonus IssueBonus shares refer to the stocks issued by the companies for free of cost to their existing shareholders in the proportion of their stock holdings. Companies issue such shares to compensate the shareholders with a higher dividend payout in the form of stocks.read more, as the case may be, and if offered to a select group of investors, it is known as a private placementPrivate PlacementPrivate placement of shares refers to the sale of shares of the company to the investors and institutions selected by the company, which generally includes banks, mutual fund companies, wealthy individual investors, insurance companies.read more.

Another point that should be kept in mind is that it is an issue through which the company raises money and not a trade made between the investors on a stock exchange. IPOIPOInitial Public Offering (IPO) is when the shares of the private companies are listed for the first time in the stock exchange for public trading and investment. This allows a private company to raise the capital for different purposes.read more or an FPO takes place in the primary marketPrimary MarketThe primary market is where debt-based, equity-based or any other asset-based securities are created, underwritten and sold off to investors. It is a part of the capital market where new securities are created and directly purchased by the issuer.read more, while the stock exchange forms the secondary market.

Follow-on-Public-Offering

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Examples

Types of Follow on Public Offering

When the company raises capital by issuing completely new shares, the number of shares issued increases; however, the amount of earnings available for shareholders remains the same. This leads to lower earnings per shareEarnings Per ShareEarnings Per Share (EPS) is a key financial metric that investors use to assess a company's performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more (EPS). Such an offering is called a dilutive FPO, as it leads to a dilution of the EPS.

Whereas, when the company releases the shares previously owned by a promoter group or privately held to the general public, the number of shares may not increase, and therefore the EPS remains the same. Such an issue is considered to be non-dilutive. If the number of shares increases even in the case of existing shares issued to the public, then the issue will again become dilutive.

Reasons for Follow on Public Offering

  • A company might wish to pay off an existing debt because debt requires regular payments of interest, whether or not the company makes a profit.
  • Also, at times, the company prefers equity issues over debt for future expansions or the interest rate prevalent in the market is not favourable for the company.
  • At times, the debt holders put highly restrictive covenants on the risk-taking activities of the company and exercise a high degree of control. If such control is not welcomed by the company as its vision gets restricted, it may go for an FPO and use the proceeds to reduce debt levels and gain greater control.
  • At times companies are not able to raise enough capital through their IPO and therefore feel the need to go for an FPO.

This has been a guide to what is a Follow on Public offering. Here we discuss types, reasons, and process along with examples. You can learn more about financing from the following articles –