Difference Between IPO and FPO

Edited by Diffzy | Updated on: July 21, 2023

       

Difference Between IPO and FPO

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Introduction

For the running of the company successfully businessman is usually concerned with the two factors. One factor is profit maximization and the other factor is the funding. In simple words, it is known as a capital requirement. Capital is the lifeline of the business. For the fulfillment of the capital requirement businessman may approach various methods. Out of the various methods available, we will discuss the difference between the two methods. These are IPO and FPO. IPO and FPO both method work towards fulfilling the capital requirement of a business organization.

IPO vs FPO

The purpose of an IPO is to attract public investment to raise money, but the purpose of an FPO is to attract additional public investment.

In general, an IPO carries a higher risk than an FPO because an individual investor is largely unaware of potential future business developments. In contrast, because FPO is already a publicly traded firm, investors are aware of it. Investors can thus examine prior results and conclude the company's possibilities for future growth. The risk vs return factor is a significant additional factor that affects how IPOs and FPOs differ from one another. Although plenty of "ifs" are involved, IPOs often have the potential to bring in more money, particularly when the firm gets off to a strong start. The individual conditions and goals of the company concerned will determine whether an IPO or an FPO is profitable. A case-by-case analysis is required to determine the benefits and factors of IPOs and FPOs.

It relies on an investor's investment objectives, risk tolerance, and particulars of the offering, from that investor's point of view.

Difference Between IPO And FPO In Tabular Form

Parameters of comparisonIPOFPO
MeaningWhen a firm sells its stock to the public for the first time, it does so in the form of an offering known as an IPO.When a company first lists on the stock exchange, an FPO is issued by the company.
StatusCompanies that are privately held by people or organizations and plan to go public by trading on the major market make initial public offerings (IPOs).Public firms that are already on the market's list of listings are the ones that issue FPO. The national stock exchanges have these businesses on their lists.
TypesBased on their pricing models, fixed price issues and book-building issues are the two different forms of initial public offerings (IPOs).Dilutive FPOs, which add new shares to the company, and non-dilutive FPOs, which sell existing private shares to the public, are the two basic types of FPOs.
PriceThe price of an IPO might either be fixed or fluctuate within a set range.An FPO's cost is determined by the market and may change.
Share capitalIn an IPO, the company decides to raise more public funds to list its stock on a public exchange.Alternatively, depending on the type of FPO, the number of shares may go up or down.

What is an IPO?

IPO stands for “initial public offer”. IPO is the method by which funds are raised for the very first time. The method is used when the company is new and wants to raise funds or capital from the general public. The word “initial” is used in the IPO signifies that the capital is raised at the initial stage of the company.

When a business decides to make its first public announcement, it is known as an "IPO" or "Initial Public Offering." When a firm "goes public," it indicates that it is prepared to be listed on most domestic stock exchanges and will now offer its shares to the general public. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are the two exchanges that exist in our country. An IPO is the name given to the initial public offering (IPO), which occurs whenever a company lists for the first time on the NSE, BSE, or both and makes its shares available to the general public for trading.

When a firm is originally founded, it obtains funding through investors, entrepreneurs, a range of corporations, and occasionally even the government. The company launches its initial public offering (IPO), becomes public for the initial time, and thereafter begins trading officially on exchanges whenever it achieves an even larger level of expansion and its funding runs out or becomes insufficient.

This implies that the firm will receive cash when someone chooses to invest in it, but this also entails a significant lot of responsibility for managing the business well. The intention is to prevent any losses from being incurred by shareholders. Better liquidity for the business and its stockholders is another benefit of this.

The primary objective of an IPO is to raise money for debt repayment, expansion, and investment. Offering a portion of their shares to the public, it gives early investors and entrepreneurs the chance to recoup their capital. An IPO's (Initial Public Offering) primary goal is to raise money for a variety of uses, including corporate expansion, investment, or debt repayment. Furthermore, it offers an opportunity for early investors and founders to recoup their investments by selling a portion of their shares to the general public.

Further, we will discuss types of IPO which are as follows:

Fixed Price Issue

The corporation offers fixed-priced shares to stockholders, as the name would imply. For instance, if a business wants to raise capital, it employs a merchant banker to determine the fixed price after taking into account a variety of quantitative and qualitative factors, including the company's assets, liabilities, risks, and potential for future growth.

Book-Building Issue

An IPO known as a "book building issue" is one in which the share price is not predetermined but instead is learned throughout the offering process. To make the book-building issue more understandable, here is an example.

Consider a situation where a business has to raise money. To determine the number of shares to be issued and the price band, or range in price for a share, it appoints an investment banker who evaluates the firm from a variety of angles. After consideration, the business decides to issue IPO shares within the price range.

Following we will discuss some of the prominent characteristics of the initial public offer.

Significant IPO Features

Announcing the issuance of new shares: The corporation increases the number of shares outstanding by issuing new shares.

Underwriting: Financial institutions and underwriters help the company by assisting in the determination of the offer price, the marketing of the shares, and the administration of the sale process.

Regulations: The company is required to abide by strict regulatory standards, including submitting a prospectus to the securities regulator, providing financial information, and achieving stock market listing requirements.

The SEBI criteria for IPO are divided into two processes: for listed firms and unlisted companies.

For an unlisted company to do its initial public offering (IPO) in India, there are three possible options.

  • Norm 1 of the Profitability Route
  • QIB Route – Entry Norm II
  • Appraisal Route – Entry Norm III

SEBI Public Issue Guidelines (Listed Companies)

A listed company that plans to do a further public offering (also known as an FPO) complies with the following SEBI regulations:

If a company has changed its trade name within the last year, at least half of its revenue for the year prior must have come from assignments completed by the company under its new name.

According to the audited balance statement of its prior financial year, the size of its issuance should not be more than five times the company's pre-issue net worth.

What is FPO?

Following an IPO, an FPO is an offering of stocks to the public. Issuing shares after the firm has been listed on the stock market is also referred to as a “follow-on public offer.” In contrast to an IPO, which is just the first issuing of shares, an FPO is a second issuance. The company employs FPO after going through the IPO procedure and deciding to open up more of its shares to the public or generate money to fund an expansion or pay off debt.

The term "Follow-on Public Offer," or "FPO," is used to describe any future offerings made by businesses to raise capital after they have issued their initial public offerings. For instance, Ruchi Soya developed its FPO on March 24, 2022.

Further, we will discuss the different types of FPO. Dilutive FPOs, which add new shares to the company, and non-dilutive FPOs, which sell existing private shares to the public, are the two basic types of FPOs.

Diluted Follow-on Offering

When a business issues extra shares to raise money and sells those shares on the open market, the transaction is known as a diluted follow-on offering. Earnings per share fall off as shares are issued and outstanding.

Dilutive FPOs are typically conducted to enlarge the stock base or obtain extra funds for expansion financing.

It has been implemented in some situations to comply with SEBI regulations that require a listed firm to have a minimum of 25% in the public float.

Non-Diluted Follow-on Offering

Non-diluted follow-on offers take place when shareholders of already issued, privately owned shares offer previously issued shares for sale on the open market.

Investors prefer to invest in the FPO. There must be some reasons behind this. The qualities that attract companies and investors are as follows.

  • to raise more money from the market to meet different business needs, such as business expansion or factory setup.
  • reduce the percentage of debt on the balance sheet of the firm to deleverage it, as debt demands ongoing interest payments regardless of the company's profitability.
  • Investing in an IPO, from the standpoint of an investor, mostly entails believing in the company's growth story based on its reputation and red herring prospectus and investing early in it to profit significantly from its growth in the future.

Following we will discuss some of the prominent features or characteristics of the FPO.

Significant FPO Features

Existing stock sales: Institutions, early investors, and firm founders who still own stock in the company sell their holdings to the general public.

May or May Not Involve Underwriting: Unlike an IPO, an FPO may or may not employ underwriters because the shares are already traded publicly and are therefore capable of being sold directly on the secondary market.

Reduced regulatory obligations: Although there are still regulatory requirements, such as filing required papers and adhering to disclosure standards, the procedure is typically less stringent than during an IPO.

Difference Between IPO And FPO In Points

  • The purpose of an IPO is to attract public investment to raise money, but the purpose of an FPO is to attract additional public investment.
  • The primary goal of an IPO is to raise money through public investment, whereas the primary goal of an FPO is to attract additional public investment.
  • An FPO has comparatively little risk compared to an IPO, which has a significant level of risk.
  • Due to IPOs' higher price compared to FPOs' relatively lower price compared to the market pricing, IPO subscription fees are higher.
  • The majority of investors view IPOs as being more lucrative than FPOs. An IPO is thought to be more profitable than FPOs since it allows investors access to a firm at an early stage.

Conclusion

In light of everything that has been mentioned above it can be concluded that funding plays a vital role in any business or financial organization. All the activities are undertaken to fulfill the corporate objective of the business. IPO and FPO both are significant from the investor’s point of view.

To summarise and make things simpler to understand, an IPO is the initial public offering of shares, whereas an FPO is the initial public offering of shares of an already publicly traded firm. One way to invest to reap the rewards of an early bird is through IPO or FPO options. It is important to use caution while deciding whether to invest in an IPO or wait for a free-for-all.

References

  • https://www.stockdaddy.in/blog/difference-between-ipo-and-fpo
  • https://www.indiainfoline.com/knowledge-center/ipo/difference-between-ipo-and-fpo

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"Difference Between IPO and FPO." Diffzy.com, 2024. Fri. 12 Apr. 2024. <https://www.diffzy.com/article/difference-between-ipo-and-fpo>.



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