Difference Between IPO and FPO

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  • 16 Jun 2023

When a company decides to go public, two terms come to the fore - initial public offering (IPO) and follow-on public offer (FPO). While both involve a company offering its shares to the public, they occur at different stages of a company's growth and serve distinct purposes. What are these? Let's find out.

An IPO is an exciting milestone for a company, marking its transition from a privately held entity to a publicly traded one. During an IPO, a company issues new shares to the public for the first time, allowing individuals and institutional investors to become shareholders.

An IPO's main goal is to raise capital to fund expansion, investments, or repay debts. It allows early investors and founders an opportunity to realize their investments by selling a portion of their shares to the public.

Key IPO Characteristics

  • Offering new shares: The company issues new shares, increasing its total outstanding shares.

  • Underwriting: Investment banks and underwriters assist the company in setting the offer price, marketing the shares, and managing the sale process.

  • Regulatory requirements: The company must comply with stringent regulatory guidelines, such as filing a prospectus with the securities regulator, disclosing financial information, and meeting listing requirements of the stock exchange.

FPO: Further Capital Generation

An FPO, also known as a secondary offering, occurs after a company has already completed its IPO. Unlike an IPO, where new shares are issued, an FPO involves the sale of additional shares by a company that is already publicly listed.

The primary objective of an FPO is to raise additional capital for various purposes, such as funding acquisitions, reducing debt, or financing expansion plans.

Key FPO Characteristics

  • Sale of existing shares: The company's existing shareholders, including founders, early investors, or institutions, sell their shares to the public.

  • May or may not Involve Underwriting: Unlike an IPO, an FPO may or may not involve underwriters, as the shares are already publicly traded and can be directly sold in the secondary market.

  • Reduced regulatory requirements: While there are still regulatory obligations, such as filing necessary documentation and complying with disclosure requirements, the process is generally less rigorous than during an IPO.

IPO

  • IPOs typically occur when a company seeks to go public for the first time.
  • IPOs focus on raising funds for growth and expansion.
  • IPOs involve the issuance of new shares, increasing the total number of outstanding shares.
  • IPOs require underwriters to manage the offering, determine the offer price, and market the shares.
  • High risk
  • High risk, potentially high returns
  • Book binding, Fixed price and Dutch auction

FPO

  • FPOs happen after a company has already gone public and wishes to raise additional capital.
  • FPOs aim to generate additional capital for various purposes, such as acquisitions, debt repayment, or operational needs.
  • FPOs involve the sale of existing shares, with no change in the total number of outstanding shares.
  • FPOs may or may not involve underwriters, as the shares can be sold directly in the secondary market.
  • Comparatively less risky
  • Low risk, potentially lower returns
  • Dilutive and Non-dilutive

Determining whether an IPO or an FPO is better depends on the specific circumstances and objectives of the company involved. IPOs and FPOs have advantages and considerations which need to be evaluated on a case-by-case basis.

From an investor's perspective, it depends on investment goals, risk tolerance, and specific offering details.

In Conclusion

Both IPO and FPO play crucial roles in a company's growth and capital generation. While IPOs mark a company's entry into the public market by issuing new shares, FPOs allow already public companies to raise additional capital by selling existing shares.

FAQs

An IPO is the maiden sale of a company's shares to the public. It happens when a private company goes public and in the process lists its shares on a stock exchange.

An FPO takes place when a company that is already publicly listed decides to issue additional shares to the public. It is a subsequent offering after the initial IPO.

When a listed company offers additional shares, it is called FPO. IPO happens when a company goes public for the first time.

IPOs generally involve more stringent regulatory requirements. Companies going public through an IPO must comply with extensive regulatory guidelines, file a prospectus with the securities regulator, disclose financial information, and meet the stock exchange's listing requirements.

FPOs have reduced regulatory requirements as the company is already listed and has previously fulfilled the initial regulatory obligations.

FPOs generally offer greater liquidity compared to IPOs. In an IPO, shares are initially distributed to a limited number of investors, and it may take some time for a liquid market to develop. FPOs involve shares that are already publicly traded, providing investors with a more liquid investment option.

In an IPO, the company issues new shares, increasing the total number of outstanding shares. In an FPO, existing shareholders, including founders, early investors, or institutions, sell their shares to the public.

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