IPO Vs FPO: Difference Between IPO and FPO
- 01 Mar 2024
- By: BlinkX Research Team
An Initial Public Offering (IPO) is the method by which a privately held company collects funds by introducing its shares to the public for the first time. On the other hand, a Follow-on Public Offering (FPO) is the procedure by which a company already listed on the stock exchange secures extra capital by presenting additional shares to the public. Both IPO and FPO serve as crucial tools for companies to secure capital for their development and expansion, enhance visibility and liquidity, and provide an exit strategy for initial investors and founders.
What is an IPO?
Through an initial public offering (IPO) a private company releases its shares to the public for the first time to raise money. This transition from private to public can be a significant moment for private investors to profit, usually with a share premium and it also lets the public get in on the investment opportunity. During an IPO, a private company essentially goes from being privately owned to having its shares available for anyone to buy on the stock market. This move is a big deal because it helps the company raise funds from the public, and it can also be a win for early investors who might see the value of their shares increase.
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Table of Content
- What is an IPO?
- What is FPO?
- Key Differences Between IPO vs FPO
- Understanding IPO Process
- Understanding FPO Process
- What does IPO Indicate for Companies?
- What does FPO Indicate for Companies?
What is FPO?
FPO, or Follow-on Public Offer, is a process wherein a company already listed on the stock exchange issues additional shares, either to existing shareholders or new investors. This differs from an IPO, where a company issues its shares to the public for the first time to collect funds for business expansion. Companies opt for an FPO to broaden their equity base, typically after initiating the IPO process, making their shares accessible to the public and securing additional capital for business purposes.
Key Differences Between IPO vs FPO
The concept of IPO and FPO both involve the issuance of shares to external investors, they differ significantly in terms of their timing, purpose, and implications. Let’s understand the difference between IPO vs FPO:
| Differences | IPO | FPO |
| Timing and Purpose of IPO vs FPO | IPOs mark the first time a privately held company decides to go public and offer its shares to external investors. This step is often taken to raise substantial capital for expansion, research and development, debt repayment, and other strategic initiatives. | FPOs occur after a company has already undergone its IPO and is already listed on a stock exchange. FPOs are a means for publicly listed companies to raise additional capital by offering more shares to the public |
Company Status of IPO vs FPO
| IPOs involves the transition of a private company to a public one, marking its debut as a publicly traded entity. The company embarks on an IPO to access a wider pool of investors and unlock new avenues of capital. | FPOs involve companies that are already publicly listed. These companies have an established track record in the public market and have already undergone the scrutiny of regulatory agencies and investors during their IPO |
Underwriting and Pricing of IPO vs FPO
| In an IPO, investment banks play a crucial role in underwriting the offering. They work closely with the company to determine the initial offering price, which is often based on a thorough analysis of the company's financials, market conditions, and investor demand. | FPOs often have a more flexible pricing approach. The offering price for FPO shares may be influenced by market sentiment, the company's performance since its IPO, and the prevailing economic conditions |
Regulatory Requirements and Disclosures of IPO vs FPO
| IPOs generally entail more comprehensive disclosures due to the private-to-public transition. Companies undergoing an IPO must provide extensive information about their financials, operations, risks, and future prospects to potential investors. These disclosures are crucial to building investor confidence and facilitating informed investment decisions. | In FPOs, the regulatory requirements may be somewhat streamlined, as the company has already undergone initial scrutiny during its IPO. However, FPOs still require companies to provide updated financial information and relevant disclosures to reflect their current status and future plans. |
Share Capital of IPO vs FPO
| By initiating an Initial Public Offering, a company has the opportunity to generate new capital by introducing its shares to the public for the first time. | In a Follow-on Public Offer, the company's share capital remains constant in a non-dilutive FPO, while in a dilutive FPO, the company experiences an increase in its share capital. |
Risk Factor of IPO vs FPO
| Investors view Initial Public Offering (IPO) as a high-risk investment due to the absence of a proven track record of share performance by the company in the past.
| Investing in a follow on public offer (FPO) is comparatively less risky as investors can assess the historical performance of shares, and fundamental analysis can be conducted.
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Understanding IPO Process
After understanding the difference between IPO and FPO, here is the IPO process typically involves the following stages:
Preparation
The Preparation Stage of the Initial Public Offering (IPO) process is a crucial phase in which a company undertakes several key activities to ready itself for going public. This stage involves thorough assessments, planning, and compliance checks to ensure that the company is well-prepared for the transition from private to public ownership.
Roadmap
Companies conduct roadshows to promote the IPO to institutional investors, analysts, and potential retail investors. These events provide an opportunity for the company's management team to present their business model, growth strategies, and financial outlook.
Book Building
Investment banks gauge investor interest through a process called book building, where they collect bids from potential investors at different price points. This helps determine the final offering price.
Listing
Once the offering price is set and the required regulatory approvals are obtained, the company lists its shares on a stock exchange, making them available for public trading.
Post IPO
After the IPO is completed, the company becomes a publicly traded entity, subject to stringent regulatory reporting requirements. The stock's price is determined by market demand and supply dynamics.
Understanding FPO Process
The FPO process typically involves the following stages:
Decision and Regulatory Approval
The company's board of directors decides on the need for additional capital and obtains necessary approvals from regulatory bodies and stock exchanges.
Disclosure
Similar to the IPO process, the company must provide detailed information about its financials, operations, and future plans in a prospectus for potential investors.
Pricing
The pricing of shares in an FPO is determined through book building, where the company and its underwriters assess investor demand and set an offering price.
Subscription and Listing
Once the offering price is established and regulatory approvals are secured, the additional shares are offered to the public. Following the subscription period, the new shares are listed on the stock exchange.
Post FPO
After the FPO, the company continues to be publicly traded, with the additional shares contributing to the overall market capitalization. Investors who purchase these new shares become shareholders of the company.
What does IPO Indicate for Companies?
An Initial Public Offering (IPO) signifies a transformative milestone for companies as they transition from private ownership to becoming publicly traded entities on the stock market. This strategic move allows companies to raise capital by offering shares to the public, facilitating expansion, innovation, and debt reduction. The IPO process not only infuses funds but also enhances a company's visibility, credibility and market recognition. However, it subjects the company to increased regulatory scrutiny and demands a higher level of transparency.
What does FPO Indicate for Companies?
A Follow-On Public Offering (FPO) is a significant move for companies already listed on the stock exchange. It indicates a desire for additional capital, often to fund expansion, repay debts, or pursue strategic initiatives. Unlike an Initial Public Offering (IPO), which marks a company's first entry into the stock market, an FPO involves the issuance of new shares by a publicly traded company. Companies opt for FPOs when they require additional funding beyond their initial public listing. The decision to pursue an FPO reflects confidence in the company's growth prospects and a strategic approach to capitalise on market opportunities. From the above article IPO vs FPO, you can have a better idea of the difference between FPO and IPO.
Conclusion
Investors often choose between IPO vs FPO in the stock market, as they significantly influence their investment strategies. IPOs involve public share issuance, while FPOs target existing investors. IPOs mark a company's initial entry into the public market, while FPOs enable already-listed companies to raise additional capital. The timing, purpose, and implications of these offerings vary, reflecting different stages of a company's public journey. The BlinkX trading app offers real-time market insights, a user-friendly interface, and advanced tools to help investors make informed investment decisions and seize opportunities.
