Definition, Types, and Key Differences Between IPO and FPO

Capital is the fuel that is essential for almost all types of businesses. Organisations have various sources from which they can raise the capital required for their existing and future operations as well as growth plans. 
 

Amongst the most popular ways to raise capital is a public issue, which can take the form of an Initial Public Offering, a Follow-on Public Offer, or an Offer For Sale. In this article, we shall discuss.

  • What is an Initial Public Offering (IPO) 

  • IPO types

  • What is a Follow-on Public Offer (FPO) 

  • Types of FPO 

  • Key differences between IPO and FPO 

What is an IPO? 

An Initial Public Offering or IPO is the first public issue by a company. An IPO is an integral step in the transition of a private company into a public company. 

During the course of the IPO process, a company invites applications for its shares from various categories of investors. 

Once the application process is completed, share allotment is carried out. Based on the ratio between number of shares available for allotment and the number of share applications, an IPO can be undersubscribed or oversubscribed. 

What are the major types of IPOs? 

There are two major types of Initial Public Offerings, namely a Fixed Price Issue and a Book Building Issue. 

  • Fixed Price Issue: In this IPO types, the offer price of the issuing company’s shares is fixed. For instance, Company A invites applications for its shares at an offer price of ₹10. Investors can submit applications for the designated lot of shares at the aforementioned price. The price determination is done by the team of merchant bankers managing the issue.

  • Book Building Issue: In this type of IPO, the issuing company invites share applications with a price band instead of a fixed price, and the investors can submit their applications (or bids) on any price within said range. The final price of the shares is determined after the receipt of all the applications. A Book Building issue is centered around the overall demand for a company’s shares. 

What is an FPO? 

When a listed company invites share applications from the public following its IPO, the process is termed as a Follow-on Public Offer (FPO). Whilst an IPO is the first public issue for a company, an FPO encompasses all future public issues. Companies usually opt for FPOs for further capital requirements or debt servicing. 

Types of FPO 

There are two major types of FPOs, namely, a Dilutive FPO and a Non-Dilutive FPO. 

  • Dilutive FPO: In this type of FPO, a company offers new shares to the public, thereby further diluting its share ownership.

  • Non-Dilutive FPO: This type of FPO entails the public issue of the existing shares of a company which were previously held privately. During this process, the promoters and/ or directors of the company offer their shares or part thereof to the public. 

Differences between an FPO and IPO 

The following table sheds light on the major difference between FPO and IPO

 

Parameter 

Initial Public Offering 

Follow-on Public Offer 

Main objective 

  • Raising capital for various goals, including growth 

  • Transitioning from a private company to a public company 

  • Diluting the capital of promoters 

  • Expanding the shareholder base of the company 

  • Raising further capital 

Scope for profit 

  • Higher scope for capital appreciation and profit for investors 

  • Relatively lower scope for profit for investors

Pricing 

  • Either a high fixed price or a high price band (based on the company’s performance and market standing) 

  • Usually a price lower than the market price of the company’s existing shares 

Risk

  • Higher risk for investors since it is the first public issue of a previously privately held company 

  • Lower risk for investors since the issuing company is already listed and its shares are being freely traded in the stock market 

To sum it up 

Both an IPO and an FPO are feasible options to raise share capital for companies. Each form of public issue has its own pros and cons, and IPOs are considered riskier yet more profitable FPOs.

 

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