What’s the Difference between IPO and FPO?

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What’s the Difference between IPO and FPO?

Many companies need to raise money for expanding their operations and increasing their business growth. To raise money from the share market, IPOs and FPOs are two methods that the companies can opt for. 

You must have heard that Vodafone Idea launched its FPO in April, 2024, or about the Ixigo IPO that was released on 18th June, 2024. But what is FPO vs IPO exactly?

If you want to become an investor or a SEBI registered investment advisor, it is crucial to have basic knowledge about what is IPO and FPO and the difference between IPO and FPO. 

What is IPO?

IPO full form is Initial Public Offering. IPO is a process by which a privately held company becomes a publicly traded company by offering its shares to the public at large for the first time ever. By going public by trading its shares, a private company having a handful of shareholders shares the ownership.

IPO helps the company to get its name listed on the stock exchanges in India such as National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Why does a company launch an IPO? So that it can raise funds from the equity market. An IPO helps companies to raise a huge amount of capital which can be used by the company to expand or improve their business, make the infrastructure better, for debt repayment, etc.

Why is IPO Beneficial for the Company?

An IPO is a major source of funds for a company. It is, in fact, among the most effective methods of obtaining funding. In contrast to debt, a company that obtains money through the IPO of its shares is not required to pay interest or return the money. 

IPOs often generate publicity. This can potentially make the products of a company with IPO known to a wider group of potential customers. Increased transparency and the firm's reputation as a share listing are other benefits of an IPO. These IPO benefits may also assist a company when it comes to borrowing money.

Why is IPO Beneficial for the Investors?

Applying for an IPO allows you to invest in a company and effectively become a shareholder in that business. You will be entitled to a portion of the company's profits because you own a portion of it. The share price of the company may increase in proportion to its gradual growth. This can cause your investment to increase in value and provide you profits over the long term.

What is FPO?

FPO full form is Follow On Public Offer. The process of issuing shares to investors on stock exchanges, such as NSE and BSE, is known as FPO. It is a way to raise extra funds that the company requires for running its operations or for the purpose of carrying out its expansion goals. The FPO definition is basically that any public offerings that are made following the IPO are considered FPOs. Compared to IPOs, FPOs are fewer in number. Basically, IPO is a mandatory requirement for a company to enter the share market. But FPO is not. So, when we talk about IPO vs FPO, FPOs are less common. 

Why is FPO Beneficial for the Company?

FPO helps a company to access the capital markets and tap into a wider pool of investors. FPO allows a company to raise additional money for various business requirements such as for reducing its debt, expanding the business, research and development (R&D) and acquisitions, without incurring any debt. 

Just like an IPO, when a company successfully launches an FPO, it can improve the public’s image and allow the company to get access to a broader market. This can be especially useful for companies that seek long term financing.

Why is FPO Beneficial for the Investors?

By participating in FPOs across various businesses and sectors, investors can spread risk and possibly increase profits on their investments. Compared to an IPO, follow-on public offering (FPO) appears to be a far superior choice for investors. This is because the investors are typically in a better position to assess an FPO because there is already so much information available about the company and its performance. 

Understanding the Difference between IPO and FPO

No, let’s discuss IPO vs FPO and understand their differences. IPO refers to the first public issue of shares of a private company that is going public. However, when we talk about FPO, it is an already listed public company’s subsequent public issue of shares. IPO can only be launched by a company once, after an IPO, an already listed public company can only launch an FPO.

The purpose of releasing an IPO is to raise capital through public investment. But the FPO is released with the purpose to inflow subsequent public investment.

In general, an IPO carries greater risk than an FPO because individual investors are not aware of potential future developments in the company. As opposed to the case of an IPO, investors are aware of FPO because the company has previously been listed on a stock exchange. As a result, investors are able to extrapolate projections on the company's future growth potential based on historical performance.

An FPO carries very little risk compared to an IPO's considerable risk. While the primary goal of an FPO is future public investment, the primary goal of an IPO is capital raising by public investment. An IPO is issued by an unlisted company; an FPO is issued by an already-listed company. 

An IPO is generally riskier when we compare it to an FPO, as in the case of IPO, an individual investor does not know about what may happen with the company in the future. On the other hand in FPO, the investors are aware as the company is already listed on the stock exchange. Investors might thus draw conclusions about the company's potential for future growth by looking at its past performance.

The risk involved in an IPO is high, while in the case of an FPO it is relatively low. The main goal in the case of an IPO is to raise capital through public investment, while for FPO, the main goal here is subsequent public investment. An unlisted company issues an IPO. However, in case of FPO, an already listed company issues it.

What are the different types of IPOs and FPOs?

Let’s find out the different IPO types and FPO types. 

Types of IPO

In total, there are three types of IPOs:

• Fixed Price IPO: In case of a fixed price IPO, the company fixes the price of the shares and does not change them throughout the bidding process. In other words, the price of this IPO type remains fixed.
• Dutch Auction IPO: In case of a Dutch Auction IPO, the investors submit bids indicating how many shares they want and how much they are ready to pay for them, and the shares are distributed to the top bidders at an even rate.
• Book Building IPO: In case of Book Building IPO, the price of shares are established by investors through bidding.

Types of FPO

There are two FPO types in total:

• Dilutive FPO: When a company intends to release more shares in order to raise more money, it is known as a dilutive FPO. This is what's done to settle the debts. However, a company's value stays the same in the event of a dilutive FPO, which lowers the company's earnings per share.
• Non-dilutive FPO: In case of non-dilutive FPO, the company’s founders or large shareholders release some of their shares to the public. The money raised from this goes to the individual offering the shares and not the company. Thus, the company’s per share earnings stay unaltered. 

Conclusion

Both IPOs and FPOs are important for a company to raise funds. IPO refers to when a company’s shares are made available to the public for the first time. FPO refers to when an already listed company issues new shares to the investors. When we compare FPO vs IPO, an FPO carries very little risk compared to the considerable risk of IPO. When an IPO is newly listed, we do not know how it’ll perform. But in the case of FPO, we can check the company’s past performance. It is important for the investors as well as aspiring SEBI RIAs to know the difference between IPO and FPO. 

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