IPO Vs FPO: Differences Between IPO and FPO

Key Highlights:

• An IPO occurs when a company goes public for the first time
• FPO occurs when an already-listed company issues fresh shares

Companies across industry verticals look to raise funds from time to time to sustain operations, fund expansion, invest in new technologies, and encash market opportunities, among other things. An initial public offering (IPO) and a follow-on public offer (FPO) are two ways through which companies can raise capital. Though they may look the same at first glance, they aren’t. This blog captures the key differences between an IPO and an FPO.

What is an IPO?

When a company offers its shares to the public for the first time, it is known as an IPO. Post IPO, a company gets listed on stock exchanges, either the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) or both.

The company offering the shares is known as the issuer. Once the IPO is done, the company's shares are traded in the secondary market. IPO is a complex process that warrants a high level of expertise. A company going for an IPO seeks help from external parties such as investment banks, underwriters, promoters, etc.

Types of IPO

There are two types of IPO:

• Fixed price issue: In this type of IPO, the company's shares have a fixed price, as mentioned in the offer document. Here, you know the share's price beforehand, and the company fixes it with the help of a merchant banker or underwriter.

• Book-building issue: In this type of IPO, a company doesn't fix the price of shares but has price bands. The price is discovered during the IPO process as per the demand.

How Significant is an IPO for a Company?

1. Provides access to capital
An IPO is a way for a company to gather a large amount of capital from the public market.

2. Enhances visibility and credibility
A public offering enhances the company’s image and its reputation in the market to a large extent.

3. Provides liquidity to existing shareholders
An IPO creates an organised stock market where shares are traded, enabling founders, early investors, and employees to sell their holdings.

How Significant is an IPO for Investors?

An IPO is a great opportunity for investors to buy shares of a company at an early public stage. If the company's development is positive and its performance is strong, investors can benefit from higher share prices, greater wealth, and long-term gains in their portfolios.

What is an FPO?

In an FPO, a company already listed on the exchange offers new shares to investors, just like Vodafone Idea. The telecom major has come out with its FPO with an issue size of ₹18,000 crores.

To know more about the Vodafone FPO, watch this video: https://www.youtube.com/watch?v=ihLh5rLn2Jg

Types of FPO

FPOs fall into two categories:

• Dilutive: A company offers more shares to raise equity or to reduce debt in a dilutive FPO.

• Non-dilutive: In a non-dilutive FPO, the company's promoters and other large shareholders sell their existing shares. In this type of FPO, no new shares are created, and the proceeds received go to the shareholders placing it, and not the company.

How Significant is an FPO for a Company?

1. Access to additional capital
An FPO is a way for a publicly listed company to raise more funds through the stock market.

2. Indicator of confidence
An FPO signals that the management is optimistic about the company's future.

How Significant is an FPO for Investors?

1. Price advantage
An FPO sells shares at an attractive price or at a discount from the current market price, thereby giving investors a potential cost advantage and a favourable entry point.

2. Financial statements
The company releases updated financial disclosures before an FPO. Before investing, this helps investors evaluate the company's profitability, performance, risks, and growth prospects to determine its future return on investment.

IPO vs FPO: The Differences

Now that you know the meaning of an IPO and FPO, let’s look at their differences. The table captures the key differences between them on various parameters:

FPO vs IPO: What Should You Opt For?

Choosing between an IPO and FPO depends primarily on your risk tolerance. You can subscribe to a company’s IPO if you have a high-risk appetite. On the other hand, if you don’t want to take too much risk on your investment, you can opt for an FPO. That said, in both cases, it’s best to avoid deciding without careful assessment. Evaluate a company’s fundamentals well before subscribing.

How to Invest in an IPO?

Here is how you can invest in an IPO:

Step 1: Open a Demat and Trading Account

Step 2: Visit stock exchange websites (NSE/BSE) or financial news portals. Review the company’s Draft Red Herring Prospectus (DRHP) for financials, risks, and objectives.

Step 3: Choose your application method from ASBA (Application Supported by Blocked Amount) via net banking or UPI-based application through your trading platform.

Step 4: Apply during the IPO window, which remains open for 3–5 working days. Select the number of lots and bid price (or apply at cut-off price).

Step 5: Approve fund blocking. For UPI, accept the mandate request in your UPI app. For ASBA, funds are blocked in your bank account until allotment.

Step 6: Shares are allotted via a computerised lottery system. If allotted, shares reflect in your demat account before listing.

Step 7: On listing day, shares are available for trading. You may choose to hold your investment or sell, depending on market movements.

How to Invest in an FPO?

Here is how you can invest in an FPO:

Step 1: Read the RHP filed with SEBI to understand the company’s financials, the purpose of the FPO, and share details.

Step 2: You must have an active demat account to receive allotted shares. Apply via ASBA through your bank account or offline via physical forms from NSE/BSE-authorised intermediaries.

Step 3: Fill in the bid details by entering quantity, price (within the price band), and personal information accurately.

Step 4: Submit online via your bank or offline through designated centres before the closing date.

Step 5: Wait for allotment. After closure, shares (if allotted) are credited to your demat account.

Step 6: Track the listing date to assess market performance and decide whether to hold or sell.

Conclusion

IPOs and FPOs are both important avenues for companies to raise capital, but they cater to different stages of a company’s journey and present distinct opportunities for investors. While IPOs open the door to investing in a business at its market debut, FPOs offer a chance to invest in companies with an existing track record. Understanding the differences in purpose, pricing, regulatory requirements, and risk profile can help you align your choice with your investment goals and comfort level. In either case, thorough research and a careful review of the company’s fundamentals remain essential before making any investment decision.