Personal Finance

Distinguishing between IPO and FPO

February 14, 2021

Distinguishing between IPO and FPO

Currently, it’s raining IPOs and we are here to get you ready and take you on a ride to understand everything that revolves around Initial Public Offering.

This piece will also break down the difference between an IPO and FPO which is the follow-on public offer (FPO).

These differences will help keep you on the right track and are probably the first few fundamentals that newbie stock investors should learn about before they begin investments in the stock market.

Firstly, let’s get your basic concepts of an IPO clear

The IPO is the very first time a company goes public. But what does going public mean? This means the company has now offered its shares to the public at large and is ready to get listed at the stock exchanges of the country.

The company will now be a part of the BSE and National Stock Exchange (NSE). The first time a company gets listed at BSE, NSE, or both and offers its shares to be publicly traded, the offering is called an IPO.

What going public means for the company and its investors

When an IPO hits the market, it means that the company will get funding when investors start investing in the company, however, this doesn’t come easy but comes with a great deal of responsibility of running the company in an efficient way so that its shareholders do not run into losses. Opening the company to the public would also mean increased liquidity for it.

Whereas in the case of an investor, buying shares in a company means that one will be getting part ownership in the company. Once a company goes public, it also opens up options such as ESOP or employee stock ownership plans.

A company may offer employees stock ownership which also has benefits likely profit sharing, however happens only if the company is performing extremely well in terms of its revenue and profit.

Moving on to now understanding FPO

FPO (Follow on Public Offer) is a process by which a company, which is already listed on an exchange, issues new shares to the investors or the existing shareholders, usually the promoters. FPO is used by companies to diversify their equity base.

The company uses FPO after it has gone through the process of an IPO and decides to make more of its shares available to the public or to raise capital to expand or pay off debt.

What it means for the company

The company uses FPO after it has gone through the process of an IPO and decides to make more of its shares available to the public or to raise capital to expand or pay off debt.

Types of FPO

The two main types of FPOs are dilutive which means that new shares are added in the case of and non-dilutive FPO it means that existing private shares are sold publicly.

Diluted Follow-on Offering

Diluted follow-on offerings happen when a company issues additional shares to raise funding and offer those shares to the public market. As the number of shares increases, the earnings per share decrease.

Non-Diluted Follow-on Offering

Non-diluted follow-on offerings happen when holders of existing, privately-held shares bring previously issued shares to the public market for sale.

How is an IPO different from an FPO

An IPO is the first public issue of the shares of a private company that is going public whereas an FPO is the subsequent public issue of the shares of an already listed public company.

IPO is released with an intention to raise capital through public investment whereas FPO is offered with an aim to inflow subsequent public investment.

An IPO is generally riskier than FPO as in IPO an individual investor does not know about what may happen with the company in the future. On the other hand in FPO, the investors are aware as the company is already listed on the stock exchange. Therefore, investors can study past performance and make assumptions about the company’s future growth prospects.

The risk involved in an IPO is high, while in the case of an FPO it is relatively low.

The main objective in the case of an IPO is to raise capital through public investment, while for FPO, the main objective is subsequent public investment.

Unlisted company issues for an IPO, however for an FPO, an already listed company issues an FPO.

Conclusion

All in all, to make it easier to comprehend, an IPO is the first time shares are made available for public investment, whereas FPO is the first time and thereafter when public issue of the shares of an already listed public company.