IPO vs FPO: Key Differences Between IPO and FPO

A company needs funds to run its operations in a streamlined manner. It can raise it in the form of equity or even seek a loan from financial institutions. When planning to raise funds, the two most common options are  IPO and FPO.

When raising funds for the first time by offering shares to the public, it is called the Initial Public Offering (IPO). But if you need additional funds, you can go for a Follow-on Public Offering (FPO). But is that it?

No, understanding IPO vs FPO is crucial for both investors and companies alike. So, let us find all the details here. Starting from what they are to the difference between IPO and FPO, we have covered everything.

So, read this guide to make better decisions that align with your investment goal. 

What is IPO

An Initial Public Offering (IPO) is the process through which a private company offers its shares to the public for the first time, transforming into a publicly traded entity. This event allows the company to raise capital from public investors, which can be used for various purposes such as expansion, paying off debt, enhancing its market presence or even used as a means for the existing shareholders to sell their existing holdings.

The key features of the IPO are as follows:

• Capital Raising: An IPO is primarily a means for companies to raise funds. The money raised from the sale of shares is termed as "share capital" and is crucial for financing growth and development initiatives.

• Public Trading: Once a company goes public through an IPO, its shares are listed on stock exchanges, allowing them to be freely traded by investors. This liquidity is attractive to both retail and institutional investors.

• Underwriting Process: Typically, investment banks are hired to underwrite the IPO. They assist in determining the initial share price, marketing the shares, and ensuring compliance with regulatory requirements, such as filing a prospectus with the Securities and Exchange Commission (SEC).

• Prospectus: A detailed prospectus is prepared, which outlines essential information about the company, including its business model, financial performance, risks involved, and how the raised funds will be utilized. This document is crucial for potential investors to make informed decisions.

• Investor Exit: In many IPOs, promoters or early investors may sell their shares via an Offer for Sale (OFS), enabling them to book profits or reduce their holdings. This is common in mature companies seeking to provide liquidity to initial stakeholders.

Now that you know what an is IPO, let us understand its types here.

Types of IPO

There are two broad ways through which a company can launch its IPO. These methods differ in how share prices are determined and how investors participate in the offering. These are:

1. Fixed Price Issue

This involves setting a predetermined price for shares before the IPO begins. Investors know the exact price of each share and must pay the full amount upfront when subscribing.

The key features of the fixed price issue are as follows:

• The share price is fixed and disclosed in advance, as stated in the prospectus.

• The prospectus must be registered with the Registrar of Companies (RoC) before the subscription opens.

• The subscription period typically lasts between 3–10 business days.

• Demand for shares is revealed only after the issue closes, not during the subscription period.

2. Book Building Issue

Book building allows for dynamic price discovery through a bidding process. Investors bid within a specified price range (price band), and the final price is determined based on demand.

Here are the features of the book building issue:

• A price band is provided, allowing investors to bid within a range (e.g., Rs 100 – Rs 120).

• The final offer price is decided at the end of the bidding process, reflecting market demand.

• Demand for shares is tracked daily during the subscription period.

• A draft prospectus is filed with SEBI before bidding; the final prospectus is filed with the RoC after pricing.

These two methods provide companies with flexibility in pricing their IPOs while catering to different investor needs and market conditions.

To understand the FPO vs IPO, it is important to understand FPO as well. So, let us now explore the details of the same here.

What is FPO

A Follow-on Public Offer (FPO) is when a company already listed on a stock exchange issues additional shares to raise capital. This allows the company to generate funds after its Initial Public Offering (IPO) by offering new shares to both existing and new investors. The funds raised through an FPO can be used for various purposes, such as expansion, debt reduction, or funding acquisitions.

The features of the FPO are as follows:

• Capital Raising: FPOs are used to raise additional capital for various corporate needs, such as financial expansion or debt repayment.

• Existing Shareholders Opportunity: An FPO provides an opportunity for existing shareholders to monetize their investments.

• Dilution or Non-Dilution: FPOs can be dilutive, where new shares increase the total number of outstanding shares, or non-dilutive, where existing shareholders sell their shares.

• Market Reputation: Conducting an FPO can reinforce a company's market presence, signaling stability and growth potential.

• Regulatory Requirements: FPOs generally have fewer regulatory requirements than IPOs because the company is already listed on the stock exchange.

Understand what is IPO and FPO is incomplete without knowing their types. So, let us now explore the types of FPO. 

Types of FPO

FPOs allow publicly listed companies to issue additional shares to raise capital after their IPO. There are three main types of FPOs, which are as follows:

1. Dilutive FPO

It involves the issuance of new shares by the company, which increases the total number of outstanding shares. Its features are as follows:

• New shares are created, leading to an increase in the total number of outstanding shares.

• Earnings per share (EPS) may decrease due to the larger denominator in the EPS calculation.

• The capital raised is typically used for business expansion, debt repayment, or other strategic initiatives.

• The share price may experience temporary pressure due to potential dilution effects.

• Requires approval from the board of directors before new shares can be issued.

2. Non-Dilutive FPO

It occurs when existing shareholders sell their shares to the public without issuing new shares, keeping the total number of outstanding shares unchanged. Here are the features to understand this:

• No new shares are issued; existing shareholders sell their holdings.

• The total number of outstanding shares remains constant, preserving EPS.

• Proceeds from the sale go directly to the selling shareholders rather than the company.

• This type does not affect the company's market capitalization directly.

• Often referred to as a secondary market offering.

These types of FPOs offer companies various strategies for raising capital while impacting existing shareholders differently. 

Till now, you have explored everything about IPO and FPO, including the IPO and FPO full forms. Now, the question is: what is the difference between IPO and FPO? Let’s find out here.

Key Difference Between IPO and FPO

Understanding the features and types is just the first step. To clearly differentiate IPO vs FPO, it’s important to know their key differences. Here’s a breakdown of how IPO and FPOs differ.

Now you know the IPO vs FPO. But the question still remains the same. Which of these is better for you? Well, to understand this, you need to evaluate their pros and cons as well. So, let us first find out more about these in detail here.

Pros and Cons of FPO and IPO

It is clear that IPO and FPOs are used to raise funds. However, there are a few pros and cons associated with each of these. These will help you make the right decision. So, let us now explore these here.

Advantages of IPO

• Access to Capital: IPOs provide the initial and good amount of funds. This can be used for expansion, acquisitions, or research and development.

• Market Visibility: After the IPO, the stocks are listed on the exchange. This enhances the market value and reputation of the company. This boosts its credibility and so valuation.

• Liquidity for Investors: These allow the investors and founders to monetize their investments. They can get back their investment and more by selling their stocks.

• Employee Incentives: Companies can offer stock options as part of employee compensation packages, improving talent retention.

• Valuation Benchmark: IPOs establish a market valuation. This is quite valuable for future fundraising. Also, it helps you establish your company's pricing during mergers or acquisitions.

Disadvantages of IPO

• High Costs: The IPO process involves significant expenses. It includes underwriting fees, legal costs, and marketing efforts. Hence, the initial costing is high.

• Regulatory Scrutiny: Public companies must comply with strict regulations and disclose financial data regularly. These strict rules are time-consuming. If not followed, it can lead to legal problems.

• Market Pressure: Companies face pressure to meet quarterly earnings expectations. This can compromise long-term goals. Also, if not met, it can impact the image of the company.

• Dilution of Control: The founders may lose control as new shareholders gain voting rights.

• Volatility: Share prices can be volatile post-IPO. This impacts investor confidence and company stability. 

While IPOs offer substantial benefits such as increased capital and market visibility, they also introduce complexities like regulatory compliance and potential volatility in share prices.

Advantages of FPO

• Additional Capital: FPOs enable companies to raise more funds for expansion, debt repayment, or other strategic initiatives.

• Increased Liquidity: Issuing more shares increases trading activity in the stock market, attracting more investors. This liquidity with the company allows them to make larger investments.

• Opportunity for Existing Shareholders: Existing shareholders can participate in the offering at potentially discounted prices. This can boost their overall investment value which is beneficial in the future.

• Established Market Presence: Since the company is already listed, investors have access to historical performance data, reducing uncertainty.

• Flexibility in Fund Utilization: Companies can allocate proceeds from FPOs based on their immediate needs. This allows them to avoid debt and work on their goals easily.

Disadvantages of FPO

• Dilution of Shares: In dilutive FPOs, existing shareholders may see their ownership percentage decrease, impacting earnings per share (EPS).

• Market Perception Risks: Investors may interpret an FPO negatively if it signals financial instability or excessive dependence on external funding.

• Regulatory Compliance: Although less stringent than IPOs, FPOs still require adherence to regulatory standards for transparency.

• Potential Price Decline: Share prices may drop if the market reacts unfavorably to the announcement of an FPO.

• Limited Investor Interest: If not marketed effectively or priced attractively, an FPO may fail to generate sufficient demand.

While FPOs provide a valuable opportunity for companies to raise additional capital efficiently, they require careful management of shareholder expectations and market perceptions.

FPO Vs IPO- Which is Better for Investors

Investors often face the decision of choosing between an IPO and FPO. Both options provide opportunities to invest in companies, but they differ significantly in terms of risk, returns, transparency, and market sentiment. 

IPOs offer the chance to invest in a company at its public debut, presenting high growth potential. Investors may benefit from substantial returns if the company performs well. However, IPOs carry higher risks due to limited historical data and market volatility, making them suitable for risk-tolerant investors seeking early-stage opportunities.

In contrast, FPOs allow established companies to raise additional capital by issuing more shares. They provide greater stability and transparency, as investors can analyze the company’s past performance and financial health. FPOs typically come with lower risks and may offer shares at discounted prices, making them attractive for conservative investors.

In short:

• IPOs are for early bets.

• FPOs are for informed choices.

Both are tools to grow your portfolio. The right pick depends on your risk appetite, research, and long-term financial goals. A balanced approach may include both types of offerings based on individual preferences.

Conclusion

Choosing between an IPO and FPO is a tough decision to make. It is not just about what is better but about what fits your investment style.

IPOs offer a chance to get in early. It often has big potential but also more uncertainty. You’re betting on the future of a company just stepping into the market.

FPOs, on the other hand, give you the benefit of hindsight. The company is already listed, its financials are public, and you have data to back your decision.

However, one thing is certain: both serve one goal for the company and the investor. Still minute differences can make a big impact. Remember, there is no one-size-fits-all. The smart move is to align your choice with your risk appetite, investment timeline, and how much research you’re willing to do.

So, select the one that aligns with your strategy and not the one that is a market trend.

FAQs

1. What is the key difference between IPO and FPO?

An IPO is when a company offers its shares to the public for the first time. An FPO is one which is when an already listed company issues shares to raise additional capital.

2. Which is riskier: IPO or FPO?

Well, both carry a certain amount of risk with them. But, IPOs are considered more riskier than FPO. IPO launches a new company to the market whose history is unknown. On ther other hand, FPO is one where the company performance is known. So, the risk is comparatively reduced with FPO.

3. Can retail investors apply for both IPO and FPO?

Yes, retail investors can invest in both IPOs and FPOs through their demat and trading accounts. But remember, these is subject to certain terms, availability, and eligibility as well.

4. Why do companies go for an FPO after an IPO?

Companies use FPOs to raise more funds for business expansion, repay debt, or meet other financial needs after they are already publicly listed.

5. Do FPO shares come at a discounted price?

Often, yes. Companies may offer shares at a discount during an FPO to attract investors and boost participation, especially if quick funding is required.