After Ruchi Soya's Rs 4,300-crore follow-on public offer (FPO) on March 24, many new investors are scratching their heads over the term. If you are looking to invest, but don’t know what an FPO is or how is it different from an IPO, here is all you need to know.

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What is an FPO?

An FPO or follow-on public offer is a process in which a company already listed on the stock exchange issues new shares to the existing shareholders or to the market for new investors. Through an FPO, a company can issue new shares to the investors or the existing shareholders, usually the promoters. An FPO is used by a company to diversify their equity base or pay off debt.

Also read: Ruchi Soya FPO: Public offering subscribed over 8% on Day 1; retail portion booked 20%

Difference between FPO and IPO

An IPO or initial public offering is a process through which a private company goes public by issuing shares to the public for the first time. An IPO is usually riskier as investors need to thoroughly research the company and its records before investing.

On the other hand, an FPO is floated by a company that is already listed in the stock exchange. Investors can just analyse the market trends regarding the company and decide to invest.

Also read: Ruchi Soya FPO: A look at strengths, weaknesses, opportunities and threats (SWOT)

IPOs are generally used by private companies to expand their funds, and FPOs are used by public companies to cover their debts, expand capital or reduce their stake in the company.

Why do companies go for an FPO?

The reason why a company issues an FPO may be to expand its equity base or to raise capital to expand or pay off debt. The company can issue an FPO only after the process of an IPO, that makes their shares available to the public.

Also read: Gujarat Polysol Chemicals files DRHP for Rs 414 crore IPO

There are three major purposes for issuing an FPO:

To reduce the existing debt of a company.

To expand capital for a company.

To reduce the owner’s/ internal stakeholders’ stake in the company.

Types of FPOs

There are two main types of follow-on public offers, a dilutive FPO and a non-dilutive FPO. In the first, the company’s board of directors agrees to release new share offerings to the public. This method is used to raise additional capital or pay off debt.

In the non-dilutive FPO, shareholders of the company sell their private shares to the public. Here, directors or substantial shareholders sell off privately-held shares. Here the money goes to the holder selling the shares, and not to the company.

Should you go for it?

Usually, the share price issued in an FPO is lower than the market price. Several shareholders buy shares at a discounted market price and sell them in the market to gain a premium on their transaction.

Also read: From IPO tsars to market pariahs: These companies lost Rs 2.28 lakh crore in M-cap

Thorough research is required to participate in an FPO to know about the company, but it is easier as compared to the research required for an IPO. If you are looking for an opportunity to buy shares of a company and sell them or a profit, then you should participate in an FPO.

(Edited by : Shoma Bhattacharjee)