An issuance of stock following a company’s Initial Public Offer is called a Follow on Public Offer. A company opts for the FPO route when it wishes to raise additional capital from the shareholders and new investors.
Difference between Initial Public Offer and Follow on Public Offer
An Initial Public Offer is primarily for companies which are not listed on a stock exchange while Follow on Public Offers are conducted by companies which are listed on an exchange.
The purpose of an IPO is to enable a new company to approach shareholders for the first time to raise capital and get listed on a stock exchange. The purpose of an FPO is to make additional funds available from the public for a company’s expansion.
Types of Follow on Public Offer
Dilutive follow on public offer- This offer is made in case of selling more equity in the company, following which, the board of directors will increase the share of the float, i.e., the total number of shares which are publicly owned and available for trading. This additional cash which arises from the increase in float can be used to pay off company’s debt or it can be utilized for expanding the company’s business. Dilutive follow on public offer is a dilution of earnings on each share. This happens because new shares are added which are eventually sold by the company, increasing the outstanding shares in the market. While some may consider this offer a positive sign for the company as it may be beneficial for the shareholders, some might be of the view that it is not a favourable move as regards short term goals.
Non-dilutive follow on public offer- In order to diversify the earnings of the company, the shares which are privately held by the company are put up for sale in the market by its directors or another authority involved in the company’s management. Since there are no new shares being introduced in the market, only these privately held shares are sold. Hence, there is no dilution of shares to the existing share holders. This procedure does not lead to any benefit for the shareholders and the company. In fact, this process leads to a commanding position for outside institutions in the company. This is also known as the secondary market offering.