Follow on Public Offer & Rights Issue

Follow on public offer (FPO) 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. An FPO is essentially a stock issue of supplementary shares made by a company that is already publicly listed and has gone through the IPO process. FPOs are popular methods for companies to raise additional equity capital in the capital markets through a stock issue. Public companies can also take advantage of an FPO issuing an offer for sale to investors, which is made through an offer document.

FPOs should not be confused with IPOs, as IPOs are the initial public offering of equity to the public while FPOs are supplementary issues made after a company has been established on an exchange. FPO is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations.

A follow-on offering (often but incorrectly called secondary offering) is an issuance of stock subsequent to the company’s initial public offering. A follow-on offering can be either of two types (or a mixture of both): dilutive and non-dilutive. A secondary offering is an offering of securities by a shareholder of the company (as opposed to the company itself, which is a primary offering). A follow on offering is preceded by release of prospectus similar to IPO: a Follow-on Public Offer (FPO). For example, Google’s initial public offering (IPO) included both a primary offering (issuance of Google stock by Google) and a secondary offering (sale of Google stock held by shareholders, including the founders).

Difference between Initial Public Offer and Follow on Public Offer

Ø IPO is made when company seeks to raise capital via public investment while FPO is subsequent public contribution.

Ø First issue of shares by the company is made through IPO when company first becoming a publicly traded company on a national exchange while Follow on Public Offering is the public issue of shares for an already listed company

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.

One example of a type of follow-on offering is an at-the-market offering (ATM offering), which is sometimes called a controlled equity distribution. In an ATM offering, exchange-listed companies incrementally sell newly issued shares into the secondary trading market through a designated broker- dealer at prevailing market prices. The issuing company is able to raise capital on an as-needed basis with the option to refrain from offering shares if unsatisfied with the available price on a particular day.

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.

As with an IPO, the investment banks who are serving as underwriters of the follow-on offering will often be offered the use of a green shoe or over-allotment option by the selling company.