IPO and FPO are the two most common terms in the share market. They are two different procedures that companies use to raise funds from investors for different objectives. However, IPO and FPO differ from each other in various ways.
Anyone investing in the stock market needs to know what IPO and FPO mean and what the differences are. This article provides a detailed understanding of the meaning, types, and objectives of IPO and FPO and also explains the differences between FPO and IPO on multiple grounds such as method of financing, ownership dilution, regulatory framework, pricing, etc.
What is IPO
IPO stands for Initial Public Offering. In an IPO, a company goes public by offering its shares to the public for the first time. After the IPO, the issuing company is listed on the stock exchange. In India, the BSE and the NSE are the two stock exchanges on which large companies are listed. However, IPOs of small and medium enterprises (SMEs) or SME IPOs are listed on either the BSE SME or the NSE Emerge platform.
The IPO is launched on the primary market and after listing, the shares of the company are traded (bought and sold) in the secondary market on the respective exchange.
What is FPO
The full form of the FPO is Follow on Public Offer. When a listed company issues its shares to the public or to existing shareholders, i.e. promoters, to raise the required funds, it is called FPO. It is an additional or secondary issue of company shares.
IPO and FPO Similarities
- Both the FPO and IPOs are a method of equity financing wherein a company sells its shares to the public.
- Companies with a minimum market capitalization of Rs 25 crore can issue IPOs (unlisted companies) or FPOs (listed company).
- IPO process is similar to FPO.
- In both IPO and FPO, company shares are listed on the BSE and NSE.
- Both the IPO and FPO have a minimum of 35% shares reserved for retail investors (who invest upto Rs 2 lakh).
- Anyone who invests in IPO or FPO becomes an investor with a stake in the company.
- One can apply in IPO and FPO with the broker through UPI or via ASBA net banking.
Types of IPO
There are two types of IPO issues: Fixed price issue and Book Building issue.
1. Fixed Price IPO
If a company sets a fixed offer price for all shares offered, this is referred to as a fixed-price IPO issue.
For example, if a company conducts an IPO at an offer price of Rs 50/share, it is a fixed price issue. Since the price is fixed, all those bidding for the IPO are bidding at a fixed price.
2. Book Building IPO
In a book-building IPO, the issuer company sets a price range or price band say Rs 50 – Rs 60. The upper end of the price band is called cut-off price.
People who are interested in the IPO may bid at any price between the given price band. However, for allotment reason, it is always better to bid at the cut-off price. The final price is discovered after recording the IPO subscription.
Types of FPO
FPO can be of two types: Dilutive FPO and Non-dilutive FPO
1. Dilutive FPO
If a company issues an additional number of shares, this is referred to as dilutive FPO. As the number of shares in the dilutive FPO increases, the company's share value and EPS will decrease.
2. Non-Dilutive FPO
If the promoters or founders of the company sell their shares, this is referred to as a non-dilutive producer company. In this case, the total number of shares is not affected and the share price remains unchanged.
Key differences between FPO and IPO
Let's point out the important difference between IPO and FPO.
| Basis of Difference | IPO | FPO |
| Meaning | First-time issue of company's shares in the market. | Additional issue of shares to the public by a listed company. |
| Nature of Company | IPO is announced by a non-listed company to list its shares on the exchange. | FPO is offered by an already listed company. |
| Primary Market or Secondary Market | IPO is issued in the primary market. | Dilutive FPO where new shares are offered is a primary market product whereas non-dilutive FPO is a secondary market issue. |
| Documents | A company files DRHP and RHP for SEBI's approval to launch IPO. | Companies only need to file RHP for FPO, DRHP is not required. |
| Regulatory Framework | Strict regulatory requirement as companies going public has to follow stringent regulatory process such as filing IPO prospectus, financial reporting, corporate governance standards, etc. | FPO has comparatively less regulatory framework than IPO. |
| Price | IPO can be a fixed price issue or book-building issue offered at a price range. | FPO is usually offered at a discount to the current market price of share. |
| Share Capital | The IPO can be offered by issuing new shares called fresh issue or by selling the promoter's share called offer for sale. | In dilutive FPO, the company issues additional shares so share capital increases whereas in non-dilutive FPO, promoters sell their privately held shares thus, share capital remains the same. |
| Ownership Dilution | When new shares are issued (Fresh issue), it dilutes ownership but in offer for sale, there is no dilution happens. | Dilutive FPO, as its name, as companies issue additional shares which result in equity dilution. Whereas no dilution takes place in non-dilutive FPO which is similar to OFS. |
| Risk | IPOs are more risky as companies are at early stage. | Listed companies have a proven track record and visibility, therefore, FPOs are less risky. |
| Return | IPOs provide early stage access hence, considered as a lucrative investment opportunity. More and more investors are interested to apply in high-quality IPOs. | FPOs generally well-received by existing investors or people who are familiar with the company. |
Reasons to Issue FPO
Compared to IPO, FPO provides a cost-effective way to raise required capital. FPO in share market can be issued for various reason including:
- To generate funds for various purposes be it business expansion, financing a new project, setting up a new factor, etc.
- To pay off company’s existing debt. As debt capital requires regular interest payments irrespective of the profit, companies may reduce the excessive use of debt capital to balance its capital structure.
IPO and FPO Example in Share Market
Both IPO and FPO is not new in India and in past, many companies i.e., IRFC, Yes Bank, Ruchi Soya, etc. have launched FPO in share market. Let’s understand how IPO and FPO work with a leading example of IRFC. Indian Railway and Finance Corporation is a government owned company in the railway sector. Its IPO of Rs 4,633 crore was launched back in Jan 2021 at Rs 26 per share. The IPO was subscribed to 3.49 times. And a year later, company has announced its FPO to raise additional capital worth Rs 1,400 crores to meet general corporate purposes. The FPO also received good response and over subscribed to 3.49 times. Many factors including company’s fundamentals or performance, market conditions, investors sentiments and industry-specific trends affects an FPO.
