Difference Between IPO and FPO
- 30 Aug 2024
- By: BlinkX Research Team
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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. In this article, you can understand what is FPO vs IPO along with the difference between IPO and FPO
Key Differences Between IPO vs FPO
Understanding IPO and FPO differences is crucial to make informed investment decisions. Below are a few differences between IPO and FPO presented in a table.
Particulars | IPO | FPO |
| Meaning | An IPO is the initial stage of a company's public offering. | It is a strategy where a publicly listed company issues more shares to raise additional capital. |
| Company | IPO shares are issued by privately held companies | Issued by publicly traded companies |
| Information availability | The company’s information is not easily available | The company’s information is available and can be accessed by anyone. |
| Underwriting | The IPO process always involves underwriting by investment banks | Generally, underwriting is not involved. |
| Regulatory Requirements | The IPO process has strict regulatory scrutiny and is subject to disclosures | Regulatory requirements are less stringent |
| Price Determination | The offer price is determined by the company along with the lead managers | The equity shares are usually offered at the current market price or at a slight discount to the current market price |
| Potential for higher returns | High potential for capital appreciation | Low potential for capital appreciation |
| Risk | Generally, carries a higher risk | Comparatively carries a lower risk |
Table of Content
- Key Differences Between IPO vs FPO
- What is an IPO?
- What is FPO?
- Understanding IPO Process
- Types of IPO:
- The Process of FPO:
- Types of FPO
- What does IPO Indicate for Companies?
- What does FPO Indicate for Companies?
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.
What is FPO?
FPO, or Follow-on Public Offer, is a process whereby 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.
Understanding IPO Process
After the difference between IPO and FPO was understood, now is the IPO process, usually consisting of the following steps:
Preparation:
- Extensive evaluation, planning, and compliance checks are done.
- Get ready for transition from private to public ownership.
Roadshow:
- Present roadshows marketing the IPO to institutional investors, analysts, and potential retail investors.
- Business model, strategies on growth, and outlook on finances.
Book Building:
- Bids are collected from investment banks by potential investors at various price points.
- The final offering price is determined by the interest expressed by investors
Listing:
- Determine the offering price.
- Get necessary approvals from regulatory authorities.
- List shares on a stock exchange for public trading.
Post-IPO:
- A company becomes a publicly traded entity.
- Comply with strict regulatory reporting requirements.
- The price of the stock is determined by its demand and supply in the market.
Types of IPO:
There are three types of IPOs:
- Fixed Price IPO: In this, the company determines a fixed share price that remains the same during the entire bidding process.
- Book Building IPO: The investors have to determine the price for the share through a bidding process.
- Dutch Auction IPO: In this case, investors submit bids with the number of shares and at what price they are ready to buy them. So, accordingly, shares will be offered to the highest bidders at a uniform price.
The Process of FPO:
Decision and Regulatory Approval:
- First, the board of directors decides to raise additional capital.
- Get approvals from regulatory authorities and stock exchange.
Disclosure:
- Publish a prospectus with more information on financials, operations, and future plans for the potential investors.
Pricing:
- Ascertains share pricing through book building.
- Evaluate investor demand to arrive at the offering price.
Subscription and Listing:
- Come with a public offer of additional shares after fixing the offering price and obtaining approvals.
- Get the new shares listed on the stock exchange after the subscription period.
Post-FPO :
- Company remains publicly traded.
- The additional shares raise the market capitalization.
- New investors become shareholders of the company.
Types of FPO
An FPO is conducted for raising additional capital or to reduce the already existing debt. There are two types of FPOs:
Dilutive FPO: In the case of a dilutive FPO, more shares are issued by the organization to the public, increasing the number of shares outstanding in the market, although the overall value for the company remains the same. No doubt, such an action definitely causes a drop in share price and reduces EPS.
Non-dilutive FPO: This is the case when major shareholders sell their privately held shares in the market. This does not increase the total number of issued shares by the company but only the shares available with the public. In contrast to dilutive FPO, this does not affect the company's EPS since it does not alter the share count.
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 capitalize on market opportunities. From the above article IPO vs FPO, you can have a better idea of what FPO and IPO along with their differences.
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
