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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 and objectives of IPO and FPO and also explains the differences between FPO and 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.
There are two types of IPO issues: Fixed price issue and Book Building issue.
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.
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.
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.
FPO can be of two types: Dilutive FPO and Non-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.
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.
Compared to IPO, FPO provides a cost-effective way to raise required capital. FPO in share market can be issued for various reason including:
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. | As companies are already listed so FPO is offered in secondary market. |
| Risk | IPOs are more risky as companies are at early stage./td> | 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./td> | FPOs generally well received by existing investors or people who are familiar with the company. |
| 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 promoter's share called offer for sale. | In dilutive FPO, 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. |
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 got 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.
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FPO and IPO in share market are the two ways to raise equity funds.
In an IPO, a company sells its shares for the first time to the public and gets listed on the exchange. After listing, when a company needs more capital, it can issue an FPO by offering additional shares to existing investors or new investors.
IPO by good companies with strong fundamentals and growth outlook can give comparatively higher returns than FPO. By investing in an IPO, investors can invest at an early growth stage of the company.
As FPOs are announced by listed companies which are in stabilization phase hence, comparatively less profitable than IPO. Investing in FPO is less risky than IPO because investors will have access to all information such as companies past performance, valuation, and so on.
FPO is relatively considered a safer investment than an IPO because the company already has a proven track record and visibility. However, when you invest in IPO you do not have access to much information so requires a lot of research.
You can subscribe to an FPO by companies who are performing well with growing revenues, profitability and huge growth prospectus.
Anyone above 18 years age with a demat and trading account can participate in FPO. Applying for FPO is the same as that of IPO investment.
Here’s how to invest in FPO;
FPO or Follow-on Public Offer can be issued by a company to the existing shareholders or to the new investors. When FPO is offered to all, anyone can participate by applying for the FPO.
