How is FPO different from IPO?

Varieties of IPO

Initial Public Offers come in three main types that are mentioned below,

1. Fixed Price IPO: In this type, the company sets a fixed price for its shares, and this price remains unchanged throughout the entire bidding process. 
2. Book Building IPO: This type involves investors determining the price of shares through a bidding process.
3. Dutch Auction IPO: In a Dutch Auction IPO, investors submit bids indicating the quantity of shares they want and the price they are willing to pay. The shares are then allocated at a uniform rate to the highest bidders.

Implications for the Company

Upon establishment, a company secures funding from diverse sources such as corporations, investors, angel investors, venture capitalists, and occasionally even the government. As the company advances to a more significant stage of expansion, and if the existing funds become inadequate, it opts to launch an IPO, marking its initial foray into the public market and getting listed on the stock exchanges.

This move signifies that the company secures funding through investor contributions, but it also entails a significant responsibility of managing the company efficiently to prevent losses for its shareholders. Furthermore, it brings about heightened liquidity for the company.

Implications for Investors

Purchasing a share or multiple shares in a company implies acquiring partial ownership in that company. When a company undergoes the process of going public, it introduces additional possibilities for investors, including the attainability of Employee Stock Ownership Plans (ESOPs). In the context of ESOPs, a company extends the opportunity for its employees to own stocks, bringing about additional advantages such as participation in profit-sharing programs.

What is FPO?

FPO, or Follow-on Public Offer, is aptly named as it follows the IPO (Initial Public Offering). It involves the issuance of additional shares by a company after it has been listed on a stock exchange. To clarify, while an IPO is the initial or first issuance of shares, an FPO represents a subsequent offering of shares by the company.

Types of FPO & Implications for the Company

An FPO serves the purpose of either generating additional capital or alleviating existing debt. There are two categories of FPOs, which are,

1. Dilutive FPO: In a dilutive FPO, the company releases an additional set of shares into the market for public purchase while the overall valuation of the company remains constant. Consequently, the share price decreases, leading to a reduction in earnings per share.
2. Non-dilutive FPO: A non-dilutive FPO occurs when major stakeholders, such as the board of directors or founders, sell their privately held shares in the market. This approach doesn't increase the company's total number of shares; it merely enhances the availability of shares for public trading. Unlike dilutive FPOs, as this method doesn't impact the company's share count, it doesn't affect the company's Earnings Per Share (EPS).

Implications for Investors

In the context of an FPO, investors already possess insights into the company, encompassing its business model, management strategies, financials, and various other parameters.

Implications for Investors

In the context of an FPO, investors already possess insights into the company, encompassing its business model, management strategies, financials, and various other parameters.

Differences Between IPO and FPO

Mentioned below are the key distinctions between an IPO and an FPO

Meaning

1. An Initial Public Offering (IPO) is the process by which a company introduces its shares to the public for the first time.
2. Conversely, a Follow-on Public Offer (FPO) is a mechanism for companies to raise funds after their initial IPO.

Share Capital

1. Through an Initial Public Offering (IPO), a company can raise fresh capital by making its shares available to the public for the first time.
2. In a Follow-on Public Offer (FPO), the share capital remains unchanged in a non-dilutive FPO, while it increases in a dilutive FPO.

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Risk Factor

1. An Initial Public Offering (IPO) is perceived as a high-risk investment because the company lacks a proven track record in share performance.
2. Conversely, a Follow-on Public Offer (FPO) is considered relatively less risky as investors can analyse the shares' historical performance and conduct fundamental analysis.

Issuer

1. A company issuing an Initial Public Offering (IPO) is not listed on the stock exchange before the IPO.
2. In contrast, a company issuing a Follow-on Public Offer (FPO) is already listed on the stock exchange at the time of the offering.

Purpose:

1. The objective of raising funds through an Initial Public Offering (IPO) is to secure additional capital from the public.
2. On the other hand, a Follow-on Public Offer (FPO) is undertaken by a company looking to diversify its equity base.

Returns

1. Returns and risk are correlated, following the basic finance rule that higher risk yields higher returns. As investing in an Initial Public Offering (IPO) is riskier than a Follow-on Public Offer (FPO), higher returns are expected in an IPO.

Types or Offers

1. Two types of shares, equity and preference shares, are offered in an Initial Public Offering (IPO).
2. Follow-on Public Offer (FPO) is also divided into two types: dilutive and non-dilutive.

Evaluation

1. When investing in an Initial Public Offering (IPO), investors need to thoroughly assess a company, aided by a red herring prospectus. Due to its high risk, IPO investments are typically made by experienced and knowledgeable investors.
2. In Follow-on Public Offers (FPOs), the decision-making process becomes more straightforward for investors who have observed how a company performed after its IPO issuance.

Choosing between an IPO and an FPO depends on your risk tolerance and financial goals. Investing in an IPO requires a high-risk appetite as there is limited information available about the company. Conducting thorough research into the company's fundamentals is crucial before opting for an IPO.

On the other hand, an FPO is generally considered a safer option for individual and new investors. It involves less risk compared to IPOs, and the company's track record is already known. If you are a long-term investor with a substantial risk appetite and trust in the company's potential, an IPO might be suitable for you.

When comparing FPOs and IPOs, it's essential to consider the relationship between risk and returns. IPOs have the potential for higher returns, especially if the company performs well initially, but this comes with greater uncertainty. Assess your investor profile, risk tolerance, and investment goals carefully before making a decision.