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Key Highlights
- An IPO stands for Initial Public Offering. It is initiated by a company when it wants to be listed on an exchange.
- On the other hand, an FPO is called a Follow-On Public Offering through which a company raises more capital by issuing shares post IPO.
- There are two types of IPO, known as fixed price issue IPO and book building issue IPO.
- The various forms of FPO are called dilutive IPO and non-dilutive IPO.
Raising funds is an essential aspect of a company's growth. There are various ways through which a company raises capital for different purposes.The two main ways through which a company may raise funds are through an IPO (Initial Public Offering) or an FPO (Follow on Public Offering). If you are planning to raise capital for your company and are wondering about the difference between IPO and FPO, you have come to the right place.In this blog, we will cover the definition of IPO and the meaning of FPO. We will uncover the difference between IPO and FPO as well. We will also look at the advantages and disadvantages of both IPO and FPO.
What is IPO?
Before understanding the difference between IPO and FPO, it is crucial to understand what an IPO is. An IPO stands for initial public offering. It is issued when a company goes public for the first time.By going public, a company can raise capital by issuing its stocks to the general public. After an IPO, a company is listed on an exchange for the first time so that its stocks can be traded publicly.The company's stock can be listed on either the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE), or both. The listing of a company on any of these exchanges is a complicated process and requires expertise.Due to these factors, a company before going forward with its IPO, will seek assistance from outside parties, such as investment bankers, promoters, underwriters, and lawyers.
Different Types of IPO
Another significant concept to be understood before diving into the difference between IPO and FPO would be learning about the multiple types of IPOs, which are:
- Fixed Price Issue: For this specific type of IPO, the stock that will be listed on the exchange will have a fixed price. With the help of a banker, a fixed price of an IPO is agreed upon.
- Book Building Issue: There is no fixed price for the issued IPO; it instead has a price band. The price is determined after issuance depending on the demand of the listed stock.
What is FPO?
Now that you are aware of what an IPO is, you are one step closer to learning about the difference between IPO and FPO.An FPO is issued by a company that is already listed on the stock market. It is a tool that is used by a company to raise capital by issuing additional shares to the general public. A company can issue an FPO for various reasons, such as reducing debt or expanding operations.
Different Types of FPO
Another key aspect about the FPO that you will need to keep in mind before learning the difference between IPO and FPO would be the various types of FPOs. Here are the multiple types of FPOs that are usually issued:
- Dilutive: In the case of a dilutive FPO, new shares of a company are issued into the market. This causes the EPS (earnings per share) of each shareholder to decline. A dilutive FPO is issued to issue debt or raise funding.
- Non-Dilutive: If the nature of an FPO is non-dilutive, it suggests that the existing shareholders have decided to sell their holdings. A non-dilutive FPO is generally executed by the sale of shares initiated by the company's directors, founders, or pre-IPO investors.
Difference between IPO and FPO
After learning about the meaning of both IPO and FPO, it is time to learn about the difference between IPO and FPO. Here are the differences between IPO and FPO:
| Parameter | IPO | FPO |
| Listing | An IPO can only be issued if the company hasn't been listed before. | An FPO is exclusively issued after the company has already issued an IPO and is listed. |
| Offer Size | The offer size for an IPO is generally high as the capital that needs to be raised is significant. | The offer size is relatively smaller compared to an IPO as an FPO is executed to meet specific needs. |
| Regulatory Scrutiny | Regulatory scrutiny for a company that is issuing an IPO is extremely high. Because the market is being exposed to the company's stocks for the first time, the governing bodies must be extremely thorough. | For a company issuing an FPO, the regulatory scrutiny is relatively less as the company has already passed the regulatory hurdles imposed upon it when it issued its IPO. |
| Risk Assessment | As there is no past performance of a stock pre-IPO, buying an IPO is relatively risky and requires a high-risk appetite. | For a company issuing an FPO, the risk can be assessed based on the previous performance of the company's stock. |
These are the key differences between IPO and FPO.
Understanding IPO vs FPO: Going Forward
IPOs and FPOs are two primary methods through which companies raise capital from the public. Understanding these distinctions is crucial for investors considering participation in either type of offering.Both IPOs and FPOs can present opportunities for growth and profit, but they also involve risks. Careful evaluation of the company's fundamentals, market conditions, and personal risk tolerance is essential before making investment decisions.
FAQS - FREQUENTLY ASKED QUESTIONS
What is the main difference between IPO and FPO?
An IPO is the initial public offering of a company's shares, while an FPO is the subsequent issuance of new shares by an already listed company.
Why do companies conduct FPOs after an IPO?
Companies conduct FPOs to raise additional capital for expansion, debt reduction, or other strategic purposes.
How is the price of shares determined in an IPO?
The price of shares in an IPO is typically determined through a process called book-building, where investors indicate their interest at various price levels.
What are the risks involved in investing in an IPO?
Investing in an IPO can be risky as there is no historical performance to analyse. The company's future prospects and market conditions can significantly impact the success of the IPO. This is one of the key difference between IPO and FPO.
What are the benefits of investing in an FPO compared to an IPO?
FPOs often offer a lower risk profile as investors can analyse the company's performance and financial history compared to an IPO. This is a major difference between IPO and FPO.
Can an FPO lead to a dilution of existing shareholders' holdings?
Yes, if the FPO is dilutive, it will result in a decrease in the percentage ownership of existing shareholders
Which is generally considered a riskier investment, IPO or FPO?
IPOs are generally considered riskier due to the lack of historical performance data. The risk factor is extremely important when considering the IPO and FPO difference.
Are there any regulatory differences between IPOs and FPOs?
While both IPOs and FPOs are subject to regulatory oversight, there may be some differences in specific requirements or procedures. The level of regulatory scrutiny is a key difference between FPO and IPO.
Should I invest in both IPOs and FPOs?
The decision of whether to invest in IPOs or FPOs depends on your risk tolerance and investment goals.
What factors should I consider when evaluating an IPO or FPO?
When evaluating an IPO or FPO, consider factors, such as the company's financial health, industry trends, management team, and valuation.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
