A company can go public by issuing new shares or diluting its existing shares. There are two ways of doing this – initial public offering (IPO) or follow-on public offering (FPO). The first time a company offers its shares to the public, it is known as IPO, and when a company wants to raise additional funds, it offers its shares once again to retail investors. This is called a follow-on public offering.
In this blog, we will discuss the differences between IPO and FPO but before that, let’s see what FPO and IPO are?
What is an IPO?
An IPO is a private company offering its shares to the public by listing them on the stock exchange. This is because the company issues new shares to the public to raise equity capital. After IPO and subsequent listing, shares of the company are traded on a stock exchange.
Initially, a new company looks for seed funding which venture capitalists, angel investors, and PE firms provide. After the initial stability phase, companies go for an aggressive expansion that requires additional capital. They go for an IPO to raise that extra capital.
IPOs for Qualified Institutional Investors (QII)
This group includes commercial banks, public financial institutions, mutual fund firms, and foreign portfolio investors registered with SEBI. Underwriters focus on selling vast amounts of IPO shares to them at a profit even before the IPO begins. Selling shares to QIIs can help underwriters reach their target capital.
To maintain the price volatility of the stocks during the IPO process, SEBI mandates QIIs to enter a minimum 90-day lockup contract.
A company planning to go public benefits the most from institutional investors. Underwriters provide them with IPO shares before the stock market determines the price. The shares will fetch a higher price if QIIs purchase more of them as fewer shares will be available to the general public. This will help a business to raise maximum funds.
However, SEBI has laid down rules to ensure companies do not distort the IPO valuations. The regulatory body does not allow companies to allocate more than 50% shares to QIIs.
IPOs for companies
An initial public offering (IPO) gives the company access to raising a large amount of money. It will be able to grow and expand more effectively as a result. In addition, the increased transparency and credibility of the share listing can assist it in obtaining better terms when seeking loans.
Once a company believes it has matured enough to withstand the rigors of SEBI regulations and understands the responsibilities towards public shareholders, it will start advertising its interest in going public.
If a company has reached a private valuation of approximately $1 billion, a company is said to be a unicorn. Unicorns, by and large, are eligible for IPO. However, a private company with successful valuations and a proven history of profitability may also qualify for an IPO, depending on the market competition and its ability to meet listing requirements.
After listing on stock exchanges, these companies have to follow stringent guidelines of SEBI, India’s capital market regulator. These rules are meant to safeguard the interests of investors.
The new limits, for example, prohibit shareholders (individually or in concert) who hold less than 20% of a firm’s pre-IPO shares from selling more than 10% of the firm’s pre-IPO shares. If a person owns ten shares, they will be able only to sell one of them in a public offer.
Credit rating agencies registered with Sebi can now serve as monitoring agencies. As part of Sebi’s new requirements, the audit committee must now review 100% of the proceeds of an issue more frequently. Furthermore, issue proceeds for general corporate purposes would also have to be monitored, which was not previously required.
What is FPO?
Follow-on public offering refers to the issuance of additional shares to the general public after a company has been listed on the stock exchange. This happens after a company has already made an initial offering. The main motive behind FPOs is the reduction of debt.
A follow-on public offering is a next step for a company. Usually, a company launches an FPO after expanding and growing to become an established name. In the case of FPOs, companies may issue new shares and use the proceeds to manage their debt obligations.
What are the different types of FPOs?
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Dilutive offering
Dilutive FPOs occur when a company wants to release more shares to pay off debts. However, in such instances, the company’s value remains unchanged, which results in lower per-share earnings.
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Non-dilutive offering
Over here, founders or major shareholders of a company may choose to sell some of their shares to the public. As a result, the proceeds go to the individuals selling their shares and not to the company, which means the per-share earnings remain untouched.
Difference between FPO and IPO
Here are some differences between FPO and IPO:
| Parameter | IPO | FPO |
| Objective | A Company announces an initial public offering and offers shares to the general public with an aim to expand the business. | Companies offer FPOs with the main aim of expanding their equity shareholders. Sometimes companies use this route to reduce the promoter shareholding. |
| Performance | Investors do not have any metric to gauge the performance of a company; they base their decision on a document named red herring prospectus that the company submits to SEBI. Moreover, investors judge a company on market interest. So it is difficult to predict an IPO’s performance. | Once a company is listed on stock exchanges, investors get access to all the necessary information of the company. This allows them to assess the fundamentals of a company and decide whether they should go for buying its shares or not. |
| Profitability | Proceeds received by investors from an IPO are more profitable than FPO. This is because the company is in an expansion or growth phase. | In the case of FPO, investors will receive very low profits on their investment as a company issues FPO in its stabilization phase. So chances of exponential earnings are low. |
| Share capital | In case of an IPO, a company issues new shares for the general public. Hence, the number of shares increases along with the share capital. | Follow on public offer comes after the IPO. The number of shares and share capital may increase or remain the same depending on the type of FPO the company is issuing. If it is non-dilutive in nature, shares will increase, and if it is dilutive in nature, shares will be the same. |
| Risky | IPOs are very risky in nature as investments are based on assumptions and speculations. | On the other hand, FPOs are less risky as the companies launching an FOI are already established and are undergoing consolidation. |
| Company’s status | The company was unlisted at the time of issuing the IPO. After the IPO, the company is categorised as listed on a stock exchange. | As an FPO comes after an IPO, the company is already listed during FPO. |
| Price | The price in the case of an initial offering is fixed or in a variable range. This value is derived by merchant bankers handling the transactions. | Prices are dependent on the number of shares issued. |
Final Word
Both IPO and FPO are different ways of raising funds for companies. However, the key difference between IPO and FPO is in the method and timing of raising capital. Investors must go through all available information about a company before using their hard earned money to subscribe to them.
Frequently Asked Questions
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Which is better for investors, FPO or IPO?
Both these processes allow companies to raise capital and fulfil different objectives. Investors must analyse their investment goals and go for IPO or FPO according to the same. As IPO is slightly risky, risk averse investors may not enjoy putting their money in this.
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What are the different types of FPOs?
FPOs are of two types – dilutive and non-dilutive. In the case of the former, a company issues new shares, whereas in case of the latter, existing shareholders sell their shares to the general public.
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What is the lock-in period for anchor investors?
According to SEBI regulations, anchor investors availing IPO subscriptions are required to follow a lock-in period of 30 to 90 days. A Lock-in period of 30 days exists for 50% of share allocation to anchor investors, and the remaining 50% shares must be offered with a 90-day lock-in period.
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