IPO Vs FPO: What is the Difference Between IPO and FPO

Introduction

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)

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.

Definition of IPO

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.

Listing process on stock exchanges like BSE and NSE

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.

Types of IPO Pricing

Let’s understand various types of IPOs: -

• 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.

• 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.

• 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.

Follow-On Public Offering (FPO)

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.

Purpose of FPO

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.

Different Types of FPOs: Dilutive FPO and Non-Dilutive FPO

• 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.

• 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.