At the initial stage, a company starts with its own capital. However, with time, as the company grows, it requires money for various activities. This includes paying off debt, expansion, hiring skilled employees, purchasing assets etc. To fulfil these needs the company decides to raise funds.
There are various ways to raise money but among all two ways are the most popular. They are Initial Public Offer (IPO) and Follow-on Public Offer (FPO). In this article, we will study the difference between IPO and FPO in detail
Initial Public Offering (IPO) is the most common way used by companies to raise capital. India had the maximum number of IPOs in the entire world in the year 2023. A total of 242 Indian corporates came up with IPOs in 2023 in India.
So, you can understand how huge the IPO market is in India. Now before we get into a detailed discussion of IPO vs FPO, let's first understand what an IPO is.
IPO is the abbreviation for Initial Public Offering which is a method used by companies to raise capital. Through IPO the company invites the general public to invest in the company. In return, they get the ownership of shares. The company uses these funds for expansion, paying off debt and various other purposes.
After the completion of the IPO process, the company gets listed on the country's stock exchange. NSE and BSE are the two main stock exchanges in India.
The Initial Public Offering process starts with the appointment of an investment bank that will take care of the entire IPO process. Every IPO needs to be registered with SEBI and approved. After the SEBI verifies the IPO, the company can declare the date of the IPO. The company has to make an official application to the stock exchange to float its initial issue.
The company needs to advertise their IPO. This can be done through roadshows, advertising on TV and radio, etc. The company shares the key details about the IPO through this step.
After this, the investment bank goes through the financial documents and determines the price of an IPO. The price of an IPO is decided considering demand and supply. Retail investors and institutional investors start bidding for shares. Once the bidding process is completed, the company allots the shares to the investors.
After the allotment of shares, the stock gets listed on the stock exchange.
Let’s understand various types of IPOs: -
1. Fixed Price Issue
In a fixed price issue, the company sets a specific price per share well ahead of the IPO launch, which is disclosed in the offer document. This price remains constant throughout the IPO process, offering investors certainty about the price they will pay per share. This method simplifies investment decisions for retail investors by eliminating uncertainty over the final share price.
2. Book Building Issue
In contrast, a book building issue involves setting a price range within which investors can bid for shares during the IPO process. The company, along with its underwriters, specifies this range in the offer document. Investors submit bids indicating the number of shares they wish to buy and the price they are willing to pay.
The final price is determined based on the demand generated from these bids. This method allows for dynamic pricing that reflects market demand, potentially maximising the funds raised based on investor interest and market conditions.
3. Dutch Auction
The Dutch auction method starts with a high asking price that is gradually lowered until there are enough bids to sell all available shares. Investors submit bids stating the quantity of shares desired and the price they are willing to pay. The auctioneer decreases the price incrementally until the quantity of shares demanded matches the number available.
Shares are allocated to successful bidders at the final auction price or lower, ensuring efficient allocation to investors who value the shares most. This approach aims to establish a fair market price based on investor bids, promoting transparency and fair participation in the IPO process.
A Follow-on Public Offering (FPO) is when an already listed company decides to raise capital by offering additional equity shares to the public. These additional shares are issued at the current market price. It can also be issued at a discounted price to attract investors.
The company opts for FPO when it wants to expand its equity base. It is also the reflection of confidence in the entity’s future prospects. In addition to this at times the company aims to reduce its debt burden by bringing FPO.
1. Dilutive FPO
A Dilutive Follow-on Public Offering (FPO) involves a company issuing additional shares to the public, potentially diluting existing shareholders' ownership percentage. Despite the increase in shares, the price per share typically remains stable. This type of FPO allows companies to raise capital for expansion or other strategic purposes without altering the per-share value significantly.
2. Non-Dilutive FPO
A Non-Dilutive Follow-on Public Offering does not introduce new shares from the company itself. Instead, existing shareholders, such as institutional investors or insiders, sell their private shares to the public market. This type of offering provides liquidity to shareholders without affecting the total number of outstanding shares issued by the company.
Now is the time to compare IPOs and FPOs and understand how they differ:
|
Parameter |
IPO |
FPO |
|
Objective |
To raise capital by inviting the general public to invest in the company in return for shares. |
After being listed if the company needs more capital, then it opts for FPO. Its purpose is to increase the equity base of the company |
|
Stage |
IPO occurs at the initial stage when the company is going public for the first time. |
FPO takes place when the company is already listed in the market after completing the IPO process. |
|
Price Determination |
The price of an IPO is decided by an underwriting process which involves market conditions, valuation and negotiation. |
The price determination of an FPO takes place based on the investor’s demand, financial performance of the company and market conditions. |
|
Offer Size |
The company raises a large amount of funds through IPO so the offer size is large enough. |
An FPO’s offer size is less as it aims to meet specific funding needs. |
|
Regulatory Requirement |
Companies that go for an IPO need to follow strict regulations. |
FPOs have fewer regulatory requirements as compared to IPOs. |
|
Risk Involved |
IPOs carry high risk as the companies don’t carry any previous share performance record. |
FPOs are less risky as the company’s past share performance can be analysed. |
|
Profitability |
IPO can give higher returns and is more profitable than FPOs. This is because here the investors take part in the initial growth stage of a company. |
FPOs are less risky but also are less profitable because the company is in the stabilisation phase. |
The IPO and FPO market in India is experiencing a significant boom. This is primarily driven by a resilient economy and increased retail investor participation. With 56 companies, planning to raise over Rs 90,000 crore, the market is set for robust growth and dynamic activity. Interestingly, Hyundai Motor India Ltd could be the largest IPO, aiming to raise Rs 25,000 crore.
However, there's an important truth about IPOs and FPOs that investors should understand beyond the basics. The pricing strategies are notably different. IPOs are often priced based on projected future growth, which can result in overvaluation and market volatility after listing. Conversely, FPOs are usually priced nearer to the company's current market value, providing a more stable investment opportunity.
The selection of one from IPO Vs FPO depends on your risk tolerance and financial goals. If you can take risks and want high returns then an IPO is a good option. On the other hand, FPO is good for new and conservative investors. Both of them help the company to raise capital.
For more insights and guidance on IPO and other investment strategies, visit the Sharekhan Knowledge Centre.
Delve into the world of futures and options trading with Sharekhan expert guidance. Our comprehensive resources and intuitive platform empower you to make informed decisions and capitalize on market movements.
Embark on your stock trading journey with Sharekhan's comprehensive platform. Learn the fundamentals of equity trading, gain insights into market trends, and access powerful tools to make informed investment decisions.
Safeguard your investments with Sharekhan's secure and reliable Demat account. Our platform offers robust security features to protect your holdings, ensuring your investments are in safe hands. Open Demat account today and enjoy peace of mind while you invest.
Make informed mutual fund investment decisions with Sharekhan's expert guidance. Explore a wide array of funds to match your financial goals and risk tolerance. Start building your wealth today.
Leverage Sharekhan's market knowledge and experience to make informed decisions in the initial public offering (IPO) space. Our research and analysis equip you with the insights you need to identify promising IPOs and participate in their growth potential.
