Difference between IPO and FPO

Last Updated on October 10, 2023 by BFSLTeam BFSLTeam

Investing in the stock market—popular for its wealth-growing potential—offers various entry routes. In India, companies frequently raise capital through two methods: Initial Public Offerings (IPOs) and Follow-on Public Offerings (FPOs); these terms may seem similar yet they denote distinct processes, each with unique characteristics and purposes.

Difference #1: Purpose

• IPO: Going Public for the First Time

The primary purpose of an IPO is to allow a private company to become a public company. By issuing an IPO, the company aims to raise capital from the public to fund its growth and expansion plans. It also provides an exit strategy for early investors and allows the founders to monetize their investments.

• FPO: Raising Additional Capital

In contrast, FPOs are conducted by already publicly-listed companies that seek to raise more capital after their initial listing. These companies may need funds for various reasons such as expansion, debt repayment, or financing new projects. FPOs are essentially a way for existing shareholders to sell more shares to the public, and the company itself may not receive the proceeds.

Difference #2: Regulatory Requirements

• IPO: Stringent Disclosure and Regulatory Requirements

Companies planning an IPO in India are subjected to rigorous regulatory scrutiny by the Securities and Exchange Board of India (SEBI). They must disclose detailed financial information, business plans, and corporate governance structures to ensure transparency and protect investors’ interests.

• FPO: Reduced Regulatory Hurdles

FPOs, being offered by already listed companies, generally face fewer regulatory requirements compared to IPOs. While they still need to adhere to disclosure norms, the process is typically smoother and faster, as these companies have already established a track record with the stock market.

Difference #3: Price Determination

• IPO: Price Discovery through Book Building

In an IPO, the price at which shares are offered to the public is determined through a process called ‘book building.’ Under book building, the company and its underwriters assess investor demand and set a price range. Investors then bid within this range, and the final IPO price is determined based on the demand generated during the bidding process.

• FPO: Fixed Price Offering

In contrast, FPOs usually have a fixed price at which shares are offered to the public. This price is often set at a discount to the current market price to incentivize investors to participate. Unlike IPOs, there is no book building process involved in FPOs.

Difference #4: Market Impact

• IPO: Greater Market Impact

The announcement and issuance of an IPO tend to have a more substantial impact on the stock market. It can generate significant media attention and excitement among investors, leading to increased market volatility.

• FPO: Lesser Market Impact

FPOs, being a secondary offering by an already-listed company, generally have a lesser impact on the broader market. While they can still attract investor interest, the effects on market sentiment are usually milder than those of an IPO.

Difference #5: Use of Proceeds

• IPO: Capital Infusion for the Company

Funds raised through an IPO go directly to the company, allowing it to finance growth initiatives, repay debts, invest in research and development, or make strategic acquisitions. IPOs are a crucial source of capital for companies in their early growth stages.

• FPO: Shareholder Liquidity

In an FPO, the funds raised primarily benefit existing shareholders, such as promoters and early investors, who are selling their shares to the public. While the company may indirectly benefit from increased liquidity, the proceeds do not directly contribute to its capital.

Difference #6: Investor Participation

• IPO: Open to All Investors

IPOs are open to all categories of investors, including retail investors, high-net-worth individuals, and institutional investors. Retail investors can participate with a minimum application amount, making IPOs accessible to a wide range of people.

• FPO: Generally Open to All, but Priority to Existing Shareholders

FPOs are typically open to all categories of investors, but some FPOs may prioritise existing shareholders by offering them a certain quota or discount on shares. This encourages current investors to participate in the offering.

Difference #7: Timing and Market Conditions

• IPO: Timing is Critical

The timing of an IPO is crucial, and companies often choose to go public during periods of favourable market conditions. A strong market can lead to a higher IPO price and better reception from investors.

• FPO: More Flexibility in Timing

FPOs, being conducted by already listed companies, offer more flexibility in timing. These companies can choose to issue FPOs when they believe it is the right time, based on their specific capital needs and market conditions.

Difference #8: Listing Requirements

• IPO: Initial Listing

Companies opting for an IPO must meet specific listing requirements, such as minimum capital, profitability, and corporate governance standards, to get listed on the stock exchange for the first time.

• FPO: Already Listed

FPOs are conducted by companies that have already met the listing requirements during their IPO. Therefore, they do not need to fulfil the initial listing criteria again.

Additional Read: How does an IPO work?

Wrapping Up

In summary: IPOs and FPOs constitute two distinct methods that Indian companies utilise to secure capital from the stock market. Both encompass public share issuance; however, they serve different purposes– boasting varying regulatory requirements, pricing mechanisms, and impacts on the industry itself. Grasping these differences proves vital for investors eager to engage in such offerings; this knowledge better equips them to make informed decisions congruent with their investment objectives and risk tolerance.

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