The IPOs and FPOs are utilised to arrange funds from the general public and there is a misconception that IPO and FPO are similar but there is some difference between IPO and FPO.
The companies raise long term funds from the capital market for their day to day operations, new project finance and expansion purpose. In order to raise public funds, the companies or government issue the securities like bonds, debentures or shares in the primary market.
There are multiple types of issues through which the organisations float stocks/ shares in the capital market, IPO and FPO are some of those mechanisms of issuing stocks in the capital market.
This article will help you to understand, what does it mean by IPO and FPO and also the difference between IPO and FPO.
Table of Contents
IPO and FPO:
An IPO (Initial Public Offering) refers to the issues of equity shares of any company for the first time in the capital market (stock exchange). In other words, whenever an unlisted company issues its fresh shares (stocks) first time for the investors to buy, it will be known as Initial Public Offering (IPO).
Thus we can say that to raise capital from the public investment a private company requires to issue the shares in the stock market so that it is easily available for investors to buy. Such issues are done in the primary market and such offering is called the initial public offerings.
On the other hand, if a company which is already listed in the stock exchange issues the stocks second or subsequent time, it is known as Follow on Public Offering (FPO).
For instance, suppose a company which has already raised funds through initial public offering ie. the company has already diluted some proportion of equity (ownership) to raise funds from the general public. Further, if the company requires additional funds, it has to dilute an extra percentage of ownership and issue extra shares for sale, such second-time issuance of shares will be known as FPO.
The Follow on public offers can be of two types viz. Dilutive and Non-diluted public offerings.
Dilutive:
The Dilutive to investors means when the company’s board of directors agree to increase the number of floated shares in the capital market without affecting the valuation of the company. This leads to a reduction in the share price of the company, such an FPO is known as Dilutive FPO (or dilutive to investors). The company’s objective behind dilutive FPO is to raise funds for reducing debt or business expansion.
Non-dilutive:
The non-dilutive to investors occurs when the company’s largest shareholders such as directors, promoters or founders sell off their own privately held stocks in the market, such follow on public offering does not impact on the share price as the shares already exist only the number of shares available for the public increases. During non-dilutive FPO those shares are sold which are already in existence, hence also referred to as secondary market offerings.
IPO and FPO (Comparison Table):
| BASS OF COMPARISON | IPO | FPO |
|---|---|---|
| Meaning | An IPO is the first time issues by an unlisted company. | It is the second or subsequent times issues by an already listed company. |
| Pricing | The prices of IPOs are fixed or having a price range. | The prices of FPO is variable and determined by the market itself. |
| Issuer | Unlisted | Listed |
| Risk | More risky | Comparatively less risky |
| Predictability | Less predictable | more predictable |
| Objective | To raise initial funds | To enhance public investment |
| Types | Equity and Preference shares | Dilutive and Non-dilutive public offering |
| Profitability | Could be more profitable than FPO | Relatively less profitable than IPO. |
Difference between IPO and FPO:
Although both IPO and FPO sounds similar or slightly different from each other, however, there are some key differences which are explained below.
- When it comes to comparison between IPO and FPO the first thing which comes in mind is that an FPO is more predictable and one can judge the risk involved, management, previous performance reports, strategic planning and other significant information about the company, on the other hand, an IPO is less predictable as the company is new in the market.
- The price of an IPO is fixed or sometimes may carry, however, the price of FPO is determined by the market itself i.e. depends on the demand of shares is increasing or decreasing.
- As the definition suggests, an IPO is the first-ever issue (sale) of a company’s shares for the general public to purchase, on the other hand, an FPO maybe the second or third (subsequent) issues of shares in the market.
- Obviously, the company which is not listed in the stock exchange can issue an IPO, however, FPO can be issued by a listed company only.
- An IPO is riskier as compared to FPO.
- The share capital of the company will increase in case of IPO because it is the first time issue of shares whereas in case of FPO the value of share capital may or may not increase as it depends upon which types of FPO (Dilutive or Non-dilutive) is issued.
- The main objective of IPO is to raise initial capital from the public whereas the FPO objective is to enhance the public investment in the company.
- An IPO could be more profitable as compared to an FPO.
Conclusion:
In a nutshell, an initial public offering (IPO) can be defined as when the company first time listed in the stock exchange and to be listed in stock exchange it has to issue securities (equity shares) in the capital market for public investment, moreover, if the same company again issue fresh shares in the stock market, such issues are known as FPO. The major difference between IPO and FPO lies is their definition itself. Hope you would have understood the basic differences between both.
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Primary Market vs Secondary Market
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Difference between equity and preference shares
Primary Market and Types of Issues
References: Investopedia Groww.in
