Difference between Follow on Public Offer (FPO) and Initial Public Offering (IPO)
11 January, 2025
Synopsis
- IPO and FPO are ways companies raise capital.
- An IPO takes place when a company wants to go public.
- FPO aims to raise additional capital by offering new shares to the public or existing shareholders.
If you have just begun investing in the stock market, you must have come across terms such as Initial Public Offering (IPO) and Follow-on Public Offer (FPO) and both concepts are of significant importance for investors and companies. Whether you are just a beginner seeking clarity or someone who is curious, understanding the difference between IPO and FPO is crucial to developing a deeper understanding of the stock market.
What is an IPO?
An Initial Public Offering is a process through which companies raise capital by selling ownership stakes to investors. During an IPO, a private company offers its shares to the public for the very first time. In the process, the company also transitions to becoming a publicly traded entity on a stock exchange from being privately owned.
An IPO is introduced in the primary market where new securities are created. Prior to an IPO, the company’s operations, risks, finances, and other essential aspects are assessed and documented in something known as the Red Herring Prospectus. This prospectus is offered to the Securities and Exchange Board of India (SEBI) to seek approval for an IPO and to provide valuable information to investors.
Types of IPO
Book-building IPO
In a book-building IPO, the offer price for the shares is not fixed initially but is determined through a bidding process. The company and its underwriters set a floor price through which they accept bids from investors. Investors submit their bids specifying the quantity of shares they are willing to buy at different prices. The demand for the shares is assessed at various price points to determine the final offer price.
Fixed price IPO
Here, the offer prices are predetermined, and the shares are offered to every investor at a fixed price. Investors interested in participating in the IPO apply for shares as they know the exact price they will pay for the said shares.
What is an FPO?
A follow-on Public Offer is a subsequent issuance of shares by a company that has previously undergone an IPO process and has already been listed on the stock exchange, such as the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). Through an FPO, a publicly traded company aims to raise additional capital by offering new shares to the public or existing shareholders.
Types of FPO
Diluted FPO
Diluted FPO refers to the issuance of additional shares to the public that results in a decrease in the ownership percentage of the existing shareholders. Although the valuation of the company remains the same, the earnings per share are reduced. This approach is often pursued when a company aims to raise significant capital for expansion, acquisitions, or debt reduction.
Non-diluted FPO
Non-diluted FPO involves the offering of company shares without impacting the existing shareholders’ ownership. In this process, the company does not issue additional shares, instead, the board of directors or professionals sell their privately owned shares directly to the public market."
IPO vs FPO
Initial Public Offering (IPO) | Follow-on Public Offering (FPO) | |
Meaning | A company going public for the very first time by issuing shares. | The issuance of additional shares by a company already listed in the stock market. |
Share capital | Increase the share capital due to new shares being issued. | Increases the share capital |
Risk factor | Carries a certain element of risk as the company is new and has yet to establish a track record of consistent gains. | Considered less risky as the company has an established reputation in the public market. |
Investment gain | Potential for higher returns due to chances of significant price fluctuation initially. | It may offer comparatively stable returns. |
Purpose | To raise capital for expansion, research, and development or boost growth. | To raise additional funds, typically for debt reduction or acquisitions. |
While both IPO and FPO involve issuing shares to the public market, they occur at different stages of a company’s journey and serve distinct purposes. As an investor, it is always important to conduct thorough research or consult with financial professionals before making any investment decision.
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*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not an investment recommendation. Investments are subject to market risks and other risks.
