FPO vs IPO: Definitions and Key Differences

In the realm of investments, FPO and IPO are two distinct and enticing avenues. Both have unique characteristics that offer investors opportunities to be part of a company’s growth. FPO (Follow-on Public Offering) allows existing companies to raise more capital from the public, often signalling their expansion plans. On the other hand, an IPO (Initial Public Offering) is when a private company goes public for the first time. In this article, learn about IPO and FPO in detail, along with FPO vs IPO.

IPO stands for Initial Public Offering. It is the process of offering securities to the general public in the primary market. This helps a company to raise money, which it can use to develop new products, or pay off debts. For investors, it’s a chance to buy a piece of the company, and if the company does well, their shares can become more valuable.

Several companies have launched their IPOs and expanded well. For example, IRCTC (Indian Railway Catering and Tourism Corporation) is a company that offers ticketing, catering, and tourism services for the Indian Railways. They launched their IPO in 2019, and the shares grew by 243% in a year from its issue price of ₹64 per share.

When a company goes public, it gets listed on the stock exchanges. In India, there are 7 stock exchanges, out of which the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are popular.

Types of IPO

There are 3 types of IPOs as follows:

Fixed Price IPO

In a fixed-price IPO, the company sets a fixed price for the shares that will be offered to the public. This price is determined by the company’s investment bankers and is based on a number of factors, including the company’s financial performance, its growth prospects, and the overall market conditions.

Book Building IPO

In a book-building issue, the company does not set a fixed price for the shares. Instead, it invites potential investors to submit bids for the shares at a price they are willing to pay. The company then collects all of the bids and allocates the shares to the bidders who are willing to pay the highest price. This process is known as book building.

Dutch Auction IPO

In this, the investors place their bids, mentioning the number of shares they want and the price they are willing to pay. The shares are allotted to the highest bidder at an even rate. In India, this type is not commonly followed.

What Is FPO in the Stock Market?

An FPO stands for Follow-on Public Offering, is a sale of additional shares by a company that is already publicly listed on a stock exchange. This is in contrast to an IPO, which is the first time a company sells its shares to the public.

Companies issue FPOs for various reasons, including raising capital for expansion, reducing debt, or restructuring ownership. FPOs in the share market can be a good way for companies to raise capital without going through the IPO process again, which can be expensive and time-consuming.

For example, in March 2022, Ruchi Soya Industries released its FPO with the objectives of repaying or prepaying the company’s borrowings, to fund the working capital requirements of the company and for general corporate purposes.

Types of FPO

Dilutive: In this, the company issues additional shares on the market for investors to buy. However, the process doesn’t change the value of the company.
Non-dilutive: The non-dilutive FPO is chosen when some large company stakeholders, such as directors or promoters, sell their privately held shares in the market. In the process, the number of shares on the market remains unchanged.

Difference Between IPO and FPO

Both IPO and FPO allow a company to raise funds from the public. But there are certain differences between them. Here’s a table to understand IPO vs FPO.

Feature	IPO	FPO
Full Form	Initial Public Offering	Follow-on Public Offering
Meaning	The first sale of a company’s shares to the public.	A subsequent sale of additional shares by a company that is already publicly listed on a stock exchange.
Purpose	To raise capital for the company’s growth and expansion.	To raise capital for various purposes, such as expansion, reducing debt, or restructuring ownership.
Eligibility	Companies that have not yet issued shares to the public.	Companies that are already publicly listed on a stock exchange.
Process	More complex and time-consuming, as it involves the preparation of a prospectus and marketing to potential investors.	Simpler and less time-consuming, as the company is already listed and has a track record.
Risk	Higher, as the company is relatively unknown and there is more uncertainty about its future prospects.	Lower, as the company is already established and has a track record.
Potential for capital appreciation	High, as the company’s growth potential can lead to significant increases in the share price.	Lower, as the company is already established and its growth may be slower.

Conclusion

While there is no way of knowing how an IPO will perform, it is essential to dig deeper into the prospects and fundamentals of the company. In this way, you can arrive at a well-informed decision. With an FPO, as the company is already listed, you will have more information to make a well-analysed decision of whether you want a pie of the company’s future and if it is likely to deliver.

However, it is important to consider your investment objective and risk appetite before making a choice. Talk to a financial advisor. To invest in an IPO or FPO, you must have a Demat Account. Open a Demat Account on Angel One for free!

FAQs

When would a company choose an IPO?

Companies choose an IPO when they want to make their initial entry into the public markets. It is an opportunity for a private company to raise substantial capital and gain wider recognition. It allows the company’s founders, early investors, and employees to monetise their holdings.

When would a company opt for an FPO?

A company may choose an FPO to raise additional funds for various purposes. This could include financing expansion plans, funding acquisitions, reducing debt, or investing in research and development.

Can existing shareholders sell their shares in an IPO or an FPO?

In an IPO, existing shareholders, such as company founders, early investors, or employees, can choose to sell a portion of their shares as part of the offering. In an FPO, existing shareholders can also sell their shares, allowing them to liquidate some or all of their holdings. However, the decision to sell shares in either an IPO or an FPO depends on the specific terms and intentions of the company and its existing shareholders.

Which is better: FPO or IPO?

From investors’ points of view, IPOs can give higher returns and become more profitable when the company raising funds hits the growth path. However, FPO investments are less risky since you are investing in an already listed company with an established track record.

How are IPOs and FPOs similar?

IPOs and FPOs are both methods of offering shares to the public through a stock exchange. Companies issue shares in the market through IPOs and FPOs to raise funds.

Is FPO good or bad for the company?

FPO can be a good option for an established and listed company to raise fresh funds from the market.

Are IPOs and FPOs the same?

IPOs and FPOs are essentially two ways to raise capital from the market. However, an IPO is an initial public offering, which is a process through which a company lists on the stock exchange, whereas an FPO is a process for an established company to raise fresh capital from investors.

How are IPOs and FPOs similar?

IPOs and FPOs are both methods of offering shares to the public through a stock exchange. Companies issue shares in the market through IPOs and FPOs to raise funds and expand their shareholder base.