Difference Between IPO and FPO: A Complete Guide for Investors

When companies seek to raise capital from the public, they typically issue shares through public offerings. Two primary methods are the Initial Public Offering (IPO) and the Follow-on Public Offering (FPO). 

Both play vital roles in the securities market ecosystem but differ in timing, purpose, and mechanics. Based on this information, you can assess the risk and time your investment smartly.

An IPO is the first sale of a company’s shares to the public. It marks the transition of a company from a privately held entity to a publicly listed one on a stock exchange.

• Purpose: The primary objective is to raise capital to fund growth. It also helps companies repay debts, expand operations, or improve infrastructure. 

• Process: The company files a prospectus with the regulatory authority, the Securities and Exchange Board of India (SEBI). It discloses financials, business model, risks, and the intended use of funds. After the company gets approval, it must determine the share price. 

• Subscription: Investors subscribe to the IPO by placing bids within a price band (in book-built issues) or at a fixed price.

• Listing: Post subscription, shares are allotted. The company gets listed on exchanges like NSE or BSE, enabling secondary market trading.

An FPO is an issuance of shares by a company that is already publicly listed. It allows companies to raise additional equity capital from the market after the IPO. 

• Purpose: Commonly used for business expansion, acquisitions, debt reduction, or other corporate needs.

• Process: It involves regulatory filings and subscriptions, but with relatively less scrutiny.

• Investor Role: Offers existing and new investors a chance to buy more shares. It is often considered less risky than IPOs due to an established track record.

IPOs and FPOs are both means through which companies raise capital from the public by issuing shares. However, there are certain key distinctions between the two processes. Check them out in the table below:

FPOs can be classified into different types based on how the shares are issued and priced. They cater to different market strategies and investor preferences. These are broadly classified into:

• Offer for Sale (OFS): Existing shareholders sell their holdings to the public. They do so without increasing shares outstanding. 

• Fresh Issue: The company issues new shares, increasing the total share capital. 

• Qualified Institutional Placement (QIP): Institutional investors are invited to subscribe, which is a quicker method for raising capital. 

• Rights Issue: Existing shareholders are given preferential rights to purchase additional shares. 

• Dilutive FPO: The company issues new shares, which increases the total shares outstanding and dilutes existing shareholders’ equity. 

• Non-dilutive FPO: Existing shareholders sell their shares without increasing the total shares outstanding.

Initial Public Offerings (IPOs) can be structured in one of three ways:

1. Fixed Price IPO
   The company sets a predetermined price per share before the subscription opens, and this price remains unchanged throughout the offering period. Investors know exactly what they will pay, simplifying their decision.
   

2. Book Building IPO
   The issue price is determined through a bidding process, where investors indicate the quantity and price they’re willing to pay within a specified price band. The final share price is set based on demand, helping the issuer gauge market interest.
   

3. Dutch Auction IPO
   Investors submit bids stating both the number of shares desired and the price they’re willing to pay; all successful bidders pay the same price—the lowest price at which the issuer can sell the entire offering. This method aims to ensure a fair market-driven price discovery.

While IPOs often use book-building or fixed-price methods, FPOs rely on performance and trading history. Here are the two ways in which shares may be priced for an IPO. 

• Book Building Method: You can bid within a price band or range. The final price is set based on demand and supply dynamics. 

• Fixed Price Method: The company sets a fixed issue price at which you, as an investor, can subscribe.

In the fixed price method, the investment bankers and merchant bankers guide pricing. They balance both company valuation and market sentiment. SEBI reviews and approves pricing methods to ensure transparency and fairness.

When evaluating IPOs and FPOs, consider factors such as the risk profile and market conditions. 

• Risk Profile: IPOs generally carry higher risks due to excitement and limited public information while FPOs benefit from market history and higher stability

• Allocation Chances: IPOs may have stricter allocation due to oversubscription while FPOs often see a more accessible subscription.

• Market Impact: IPOs set initial market perception whereas FPOs can affect existing share prices and dilution levels.

• Subscription Process: Both require a demat account and follow the application guidelines; however, FPOs may have simpler procedures.

SEBI lays down the rules for public offerings, including:

• Eligibility Criteria: Companies must have a stable financial track record and at least 3 years of existence

• Disclosure Requirements: Issuers are mandated to disclose detailed financials, risk factors, and management information

• Pricing: Securities can be priced through a fixed price method, book-building or a hybrid offering, with a clearly defined floor and cap

• Minimum Public Offer and Allocation: At least 25% of shares must be offered to the public as per specific quotas for various investor categories (Exceptions are applicable for large-cap companies)

• Underwriting and Listing: All IPOs must be underwritten by SEBI-registered merchant bankers and listed on stock exchanges

• Minimum Subscription: An IPO must achieve a minimum level of investor subscription or the issue is cancelled, and the funds are refunded

IPOs and FPOs are crucial capital-raising tools in the stock market, serving different needs. While IPOs offer a gateway for companies to access funds initially, FPOs allow further capital infusion as the company grows. 

Understanding their differences helps you navigate market offerings confidently and align your investment with your risk appetite and goals.

This content is for educational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.