IPO V/s FPO - Which one to invest in?
Initial Public Offering (IPO) and Follow-On Public Offering (FPO) are two important concepts that every investor should know about. However, if you’re new to the Indian stock market, you may be unaware of what these concepts entail. In this article, we’re going to be taking a comprehensive look at what these two terms mean and the difference between an IPO and an FPO.
What is an IPO?
IPO or Initial Public Offering, is the process through which a company issues its equity shares to the public for the first time. In exchange, the company receives funds from the public.
The shares of a company that has gone through the IPO process are listed on the Indian stock exchanges - the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Once the shares are listed on the exchanges, they can be bought and sold freely without any restrictions.
Before we move on to the differences between an IPO and an FPO, let’s try to get a deeper understanding of the IPO.
What does it mean for the company?
An IPO is one of the many sources of funds for a company. In fact, it is one of the most efficient ways to gain access to capital. Unlike debt, a company doesn’t have to pay any interest or repay the amount that it receives by issuing its shares via an IPO. However, the company will be answerable to the investors who purchase its shares.
What does it mean for investors?
When you invest in a company by applying for an IPO, you essentially become a shareholder in that company. Since you own a part of the company, you will be eligible for a share in the profits that it generates. As the company slowly grows, its share price also may rise correspondingly. This will cause your investment to increase in value, giving you profits over the long term.
What is an FPO?
Before we do a detailed comparison of IPO vs FPO, let’s swiftly go through the concept of Follow-On Public Offering (FPO).
A company that has already issued its shares to the public via an IPO may require access to more funds. In that case, it can choose to issue more of its shares to investors in exchange for capital. All subsequent issues of shares other than the initial issue are termed Follow-On Public Offerings (FPOs).
What does It mean for the company?
As you’ve already seen, a company that requires additional capital can issue an FPO to raise funds. There are two kinds of Follow-On Public Offerings that a company may opt for, namely a dilutive FPO and a non-dilutive FPO.
In a dilutive FPO, the company issues more shares to the public. This dilutes the ownership further and reduces the earnings per share (EPS).
In a non-dilutive FPO, the existing promoters and investors sell their shares to the public. Since no new equity shares are issued, there’s no dilution of ownership or change in the EPS. However, the proceeds from such an FPO go to the selling investors and not to the company.
What does it mean for investors?
When we compare IPO vs FPO, Follow-On Public Offering seems like a much better option for investors despite its dilutive nature. Since there’s already so much information about the company and its performance, investors are usually in a better position to evaluate an FPO.
IPO V/s FPO
The table below should give you a good idea of the differences between an IPO and an FPO.
|Meaning of the term||IPO is the process through which a company issues its shares to the public for the first time.||Any subsequent issue of shares to the public after an IPO is termed an FPO.|
|Type of company||Unlisted companies issue IPOs.||Companies that are already listed on the stock exchanges issue FPOs.|
|Pricing of the issue||The pricing of an IPO can be fixed or within a range and is determined by the company in association with the Book Running Lead Managers (BRLMs).||The pricing of an FPO is determined by the market and the level of dilution that it causes.|
|Increase in the share capital||There is an increase in the number of shares.||Depending on the type of FPO, there may or may not be an increase in the number of shares.|
|Ownership dilution||Ownership gets diluted in an IPO.||Depending on the type of FPO, there may or may not be a dilution of ownership.|
|Cost for the company||An IPO is usually quite expensive for the company.||Compared to an IPO, the cost of an FPO is relatively low.|
|Risk factor||Investing in an IPO is more risky since there’s usually not much information about the issuing company.||Information on the issuing company is readily available, which makes investing in an FPO relatively less risky.|
This detailed comparison between IPO vs FPO can help you make an informed decision if you wish to invest in either of these two issues. Remember to consider the differences between an IPO and an FPO. This will help you determine the option that’s more suitable for you.
Once you’ve made your decision, you can invest in a wide range of IPOs and FPOs of companies with the m.Stock trading app. In addition to seamless investments, you also get to enjoy zero brokerage trades across trading segments.