What is an FPO? How is it different 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.
IPO: Your First Step into the Public Arena
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.
FPO: The Sequel to Your Stock Market Journey
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.
Regulatory Framework
IPOs and FPOs are subject to stringent regulations to protect the interests of investors and ensure market integrity.
Companies must adhere to disclosure requirements, due diligence processes, and other compliance measures.
The Securities and Exchange Board of India plays a pivotal role in overseeing these equity offerings.
Examples
Numerous companies have successfully leveraged IPOs and FPOs for capital raising.
For instance, Tata Steel Ltd and Power Finance Corporation Ltd have made FPOs in India.
You can look at their performance to evaluate it against an IPO. Though not strictly comparable, it will offer investment insights.
IPO vs FPO
- 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.