Differences Between FPO and IPO
Key Highlights:
- IPO occurs when a company goes public for the first time
- FPO occurs when an already-listed company issues fresh shares
Companies across industry verticals look to raise funds from time to time to sustain operations, fund expansion, invest in new technologies, and encash market opportunities, among other things. An initial public offering (IPO) and a follow-on public offer (FPO) are two ways through which companies can raise capital. Though they may look the same at first glance, they aren’t. This blog captures the key differences between an IPO and an FPO.
What is an IPO?
When a company offers its shares to the public for the first time, it is known as an IPO. Post IPO, a company gets listed on stock exchanges, either the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) or both.
The company offering the shares is known as the issuer. Once the IPO is done, the company's shares are traded in the secondary market. IPO is a complex process that warrants a high level of expertise. A company going for an IPO seeks help from external parties such as investment banks, underwriters, promoters, etc. There are two types of IPO, namely:
-
Fixed price issue: In this type of IPO, the company's shares have a fixed price, as mentioned in the offer document. Here, you know the share's price beforehand, and the company fixes it with the help of a merchant banker or underwriter.
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Book-building issue: In this type of IPO, a company doesn't fix the price of shares but has price bands. The price is discovered during the IPO process as per the demand.
What is an FPO?
In an FPO, a company already listed on the exchange offers new shares to investors, just like Vodafone Idea. The telecom major has come out with its FPO with an issue size of ₹18,000 crores.
To know more about the Vodafone FPO, watch this video: https://www.youtube.com/watch?v=ihLh5rLn2Jg
FPOs are of two types, namely:
-
Dilutive: A company offers more shares to raise equity or to reduce debt in a dilutive FPO.
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Non-dilutive: In a non-dilutive FPO, the company's promoters and other large shareholders sell their existing shares. In this type of FPO, no new shares are created, and the proceeds received go to the shareholders placing it, and not the company.
IPO and FPO: The Differences
Now that you know the meaning of an IPO and FPO, let’s look at their differences. The table captures the key differences between them on various parameters:
Parameter
Stage
IPO
IPO happens when a company is going public for the first time.
FPO
FPO occurs when a company has already completed its IPO and is listed on the exchange.
Parameter
Timing
IPO
An IPO is the initial step in a company's journey to becoming public.
FPO
A company goes for FPO when it needs more capital after an IPO to fund various corporate needs.
Parameter
Price Determination
IPO
The price is generally determined through an underwriting process involving market conditions, valuation, and negotiation.
FPO
Pricing of FPO shares is determined based on investors' demand, the company's financial performance, and market conditions.
Parameter
Offer Size
IPO
Offer size is usually large in an IPO as the company aims to raise substantial capital for growth and expansion.
FPO
An FPO's offer size is generally less as it intends to meet specific funding needs.
Parameter
Regulatory Requirement
IPO
Companies going for an IPO need to meet stringent regulatory requirements such as financial reporting, corporate governance standards, and disclosure obligations, among others.
FPO
FPOs are subject to fewer regulatory requirements compared to IPOs. However, they are still required to comply with certain regulatory laws.
Parameter
Risks Involved
IPO
As the company doesn't have any past record of share performance, IPOs are a high-risk investment option.
FPO
FPOs are relatively less risky as you can analyse the performance of a company's shares in the past.
Parameter
Complexity in Investment Decision
IPO
IPO investments are generally more complex as you need to evaluate a company in detail and go through its red herring prospectus.
FPO
In FPOs, you have information on how a company has performed after its IPO. This makes investment decisions less complicated.
| Parameter | IPO | FPO |
|---|---|---|
| Stage | IPO happens when a company is going public for the first time. | FPO occurs when a company has already completed its IPO and is listed on the exchange. |
| Timing | An IPO is the initial step in a company's journey to becoming public. | A company goes for FPO when it needs more capital after an IPO to fund various corporate needs. |
| Price Determination | The price is generally determined through an underwriting process involving market conditions, valuation, and negotiation. | Pricing of FPO shares is determined based on investors' demand, the company's financial performance, and market conditions. |
| Offer Size | Offer size is usually large in an IPO as the company aims to raise substantial capital for growth and expansion. | An FPO's offer size is generally less as it intends to meet specific funding needs. |
| Regulatory Requirement | Companies going for an IPO need to meet stringent regulatory requirements such as financial reporting, corporate governance standards, and disclosure obligations, among others. | FPOs are subject to fewer regulatory requirements compared to IPOs. However, they are still required to comply with certain regulatory laws. |
| Risks Involved | As the company doesn't have any past record of share performance, IPOs are a high-risk investment option. | FPOs are relatively less risky as you can analyse the performance of a company's shares in the past. |
| Complexity in Investment Decision | IPO investments are generally more complex as you need to evaluate a company in detail and go through its red herring prospectus. | In FPOs, you have information on how a company has performed after its IPO. This makes investment decisions less complicated. |
IPO or FPO: What Should You Opt For?
Choosing between an IPO and an FPO depends primarily on your risk tolerance. You can subscribe to a company's IPO if you have a high-risk appetite. On the other hand, if you don't want to take too much risk on your investment, you can opt for an FPO. That said, with both, you must never take a blind call. Evaluate a company's fundamentals well before subscribing.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consult with financial professionals before making any investment decisions.
FAQs on the difference between FPO and IPO
How is FPO Different From IPO?
In an FPO, a company already listed on the exchange offers shares to the public. On the other hand, in an IPO, a company going public for the first time offers its shares to the public. Also, FPOs are relatively less risky than IPOs.
Is FPO Good or Bad for a Company?
FPOs have pros and cons. While they help a company raise additional capital, the announcement of a FPO can sometimes lead to negative market reactions.
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