What Is an FPO and How Does It Differ from an IPO?

When it comes to the stock market, two terms often pop up: Initial Public Offering (IPO) and Follow-on Public Offering (FPO).

Let us look at what they mean.

What is an IPO?

An Initial Public Offering, commonly known as IPO, is the process through which a company goes public for the first time. It's the grand debut, allowing the company to list its shares on a stock exchange like the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).

Types of IPOs

• Fixed Price IPO: The share price is set and unchanging.
• Book Building IPO: Investors bid to establish the share price.
• Dutch Auction IPO: Investors bid for the number of shares and price, with allocation to the highest bidders.

This has yet to be exercised by companies in India.

Impact on Companies and Investors

Going public through an IPO is a double-edged sword. It provides much-needed funding but also comes with the responsibility of ensuring shareholder value.

For investors, buying shares means partial ownership in the company, but it also requires one to be vigilant and monitor its performance.

What is an FPO? 

A Follow-on Public Offering (FPO) is like the sequel to an IPO. It's an additional issuance of shares after a company is listed on a stock exchange. FPOs are generally more cost-effective than IPOs and are carried out to raise additional capital or reduce existing debt.

Types of FPOs

• Dilutive FPO: New shares are issued, diluting the value but not the company's worth. The funds from this sale are available to the company.
• Non-Dilutive FPO: Major shareholders, like promoters, sell their privately held shares in the market. In India, many promoters use the Offer For Sale (OFS) route for doing so. These funds are not available to the company.

How a Follow-on Public Offer (FPO) works?

• Understand the basics: Know what an FPO is. The FPO's meaning is simple. It is a listed company’s second or later public sale of shares to raise more capital. FPO’s full form is Follow-on Public Offer.

• Choose the type: Companies can pick a dilutive FPO by issuing new shares or a non-dilutive FPO, where existing large shareholders sell their shares.

• File documents: The company files its Draft Red Herring Prospectus (DRHP) with SEBI and then publishes the Red Herring Prospectus (RHP), which includes the price band, timelines, and details on the use of funds.

• Price discovery: In most cases, a price band is shared and investors bid within that range using the ASBA process.

• Bidding window: Investors apply during the issue period through brokers, banks, or supported apps.

• Allotment and listing: Final price is set based on demand. Shares are credited to demat accounts and start trading.

• Post issue use of funds: Money raised may reduce debt, support expansion, or strengthen the balance sheet.

• Portfolio note: Equity events, such as FPOs, can alter risk in your equity bucket. If you want stability alongside equities, consider adding high quality bonds on Bondbazaar to balance overall risk.

What Are the Benefits of Follow-On Public Offers (FPOs)?

• More information: Listed companies have track records, making research easier than first-time IPOs.

• Often better pricing: FPOs may come at a discount to the prevailing market price to attract investors.

• Lower process risk: Established disclosures, quarterly results, and analyst coverage guide decisions.

• Improved liquidity: A larger float can enhance daily trading volumes.

• Use of proceeds: Debt reduction or expansion can strengthen fundamentals, pairing equity exposure with bonds on Bondbazaar for a balanced risk profile.

How is an FPO different from an IPO?

• Price: IPOs have a fixed or variable price range, while the price of FPOs are market-driven.
• Share Capital: IPOs increase the share capital, while FPOs can either increase or remain the same.
• Risk: IPOs are riskier due to limited information, whereas FPOs are less risky.
• Company Status: IPOs are for unlisted companies, and FPOs are for those already listed.