Key Difference Between IPO and FPO

Adequate capital is a fundamental necessity for any business to run its operations. Whether a company plans to expand its operations or wants to repay its debts, it raises funds through public offerings through the equity market.

There are two popular ways to raise funds from the market- Initial Public Offering (IPO) and Follow-up Public Offering (FPO). These mechanisms allow companies to raise capital from public investors, but they serve distinct purposes and have unique characteristics. Understanding the difference between IPO and FPO is crucial for making informed investment decisions.

Let us understand this in detail through this blog. We will also explore various nuances of IPO and FPO.

What is an IPO?

An IPO is a process by which the company sells its shares to the public for the first time. It marks the transition of a private company into a publicly traded entity. Through an IPO, businesses raise capital for various purposes, such as expanding operations, reducing debt, or funding new projects.

IPO not only helps companies access substantial funds but also enhances their credibility and visibility in the market. Once listed on NSE or BSE, the stock exchanges, the shares are publicly traded, which offers liquidity to early investors.

Types of IPO

The three different types of IPOs are:

1. Fixed Price Issue: In this type of IPO, the company offers its shares at a predetermined share price. Investors can only subscribe to the IPO by submitting their bids at a fixed price.

2. Book-Building Issue: Book-building issues allow investors to bid within a price range. The final price is determined based on investor demand, providing companies with flexibility and enabling a fair market-based valuation of their shares.

3. Dutch Auction: It is also known as the Descending Price Auction. The auctioneer starts at a high price and then gradually lowers it until investors place bids equivalent to the total number of shares offered.

Advantages and Disadvantages of IPO

Before making investment decisions, it is important to understand the benefits and potential drawbacks of an IPO.

Advantages of IPO

• Access to Capital: It is a convenient and effective way to raise funds so that companies can fund their operations and expansion plans. 
• Market Visibility: Another vital benefit of the IPO is it provides market visibility and enhances the credibility of the firm.
• Liquidity for Shareholders: Early investors and employees can sell their shares in the stock market after listing. 
• Potential for Growth: IPOs often attract strategic investors who can drive future success.

Disadvantages of IPO

• High Costs: Launching an IPO involves significant expenses, including legal, marketing, and regulatory compliance fees. 
• Regulatory Scrutiny: Launching an IPO can be a tedious task as companies have to adhere to stringent disclosure norms and reporting standards.
• Market Volatility Risks: Stock prices are subject to market fluctuations, which may adversely impact the company’s valuation.
• Loss of Control: Founders and early investors may lose control over the company after an IPO due to the dilution of their ownership stake.

What is FPO?

An FPO stands for a Follow-on Public Offer and refers to the process of issuance of additional shares by a company that is already publicly listed. The primary objective of an FPO is to raise additional capital for expansion, debt repayment, or other corporate purposes.

The Securities and Exchange Board of India (SEBI) verifies the details and approves the FPO Prospectus. All the remaining steps are the same as the issuing of an IPO. For investors, it is easier to analyze an FPO than an IPO as the company is publicly listed, and its financial data for a significant time period is easily available, which can help you anticipate how well the company will use funds raised from the FPO.

Types of FPO

FPO can be of two types- Dilutive and Non-Dilutive. Before investing in an FPO, you should understand the two types of FPO. 

1. Dilutive FPO: In a dilutive FPO, the company issues new shares to the public, which increases the total number of outstanding shares. While this dilutes the existing shareholders’ equity, it provides the company with much-needed funds for growth. On the other hand, it diminishes the share price and decreases earnings per share metric.

2. Non-Dilutive FPO: It involves existing shareholders selling their stake in the company. This does not change the total number of shares in circulation, and the funds go to the selling shareholders rather than the company. Since it does not affect the number of shares, earnings per share is also unaffected.

Advantages and Disadvantages of FPO

Similar to IPOs, the FPOs also come with several advantages and potential challenges. Before making any investment decision, it is advised to keep these points in mind.

Advantages of FPO

• Established Track Record: The best part of FPOs is that you get an established track record of a company’s financial performance, which can help you analyze the growth potential of the company.
• Lower Risk: Considering the above point, FPOs are less risky compared to IPOs as the publicly available data helps in better analysis.
• Additional Liquidity: FPOs provide an opportunity for the company to increase the number of shares in the market, which increases liquidity.
• Growth Opportunities: The capital raised through FPOs can be used to fund expansion projects, debt repayment, or other corporate purposes, fostering growth.

Disadvantages of FPO

• Dilution of Ownership Stake (in Dilutive FPOs): Issuing new shares increases the total number of outstanding shares, which dilutes the ownership of current investors and reduces earnings per share (EPS).
• Impact on Market Sentiment: A frequent reliance on FPOs might signal financial instability or a lack of strategic planning by the company’s management to investors.
• Limited Upside for Non-Dilutive FPOs: In non-dilutive FPOs, funds go to selling shareholders rather than benefiting the company directly.
• Compliance Costs: Even though the company is already listed, conducting an FPO still involves regulatory, legal, and administrative expenses.

IPO Vs. FPO

As mentioned earlier, IPO and FPO are methods to raise funds for a company. The motive behind both of them is the same. However, there are a few differences between them, as mentioned below:

How to Invest?

Whether you want to subscribe for an IPO or FPO, the process is the same. You need to have a demat account to initiate the process. Besides this, a strategic approach is required to maximize returns and mitigate risks. Open a Demat and trading account with a trusted brokerage platform to apply for shares during the subscription window.

Assess the financial health of the company, industry position, and growth prospects. For IPOs, review the prospectus to understand their business model and objectives. For FPOs, analyze the company’s recent share performance, past financial statements and reasons for raising additional capital. Keep an eye on market sentiment and set realistic expectations, especially during volatile market conditions. 

Conclusion

As an investor, it is important to understand the differences between IPO and FPO to make informed investment decisions and give your money a better chance to grow.

IPOs are a way by which a company issues shares and gets listed, and FPOs serve as a tool for already listed companies to fund future growth. Each has its distinct advantages and challenges, and the choice between them depends on the company’s objectives and the investor’s risk appetite.

Frequently Asked Questions (FAQs)