Initial Public Offering (IPO)
An initial public offering IPO is the stage at which a company gives up private ownership and begins trading publicly. Through an IPO a company employs to raise capital through issuance of its shares to the public for the first time.
It is through strategic media coverage and announcements that a company would generate interest from investors before launching its IPO.
The final stage is filing DRHP with SEBI, which contains information about the financial position of the company, business model, future plans, and details pertaining to the issue of shares.
Post approval by SEBI, the DRHP moves into the subscription period where investors can apply for shares at the price decided at the time of opening the IPO.
The subscription period measures the demand and thereby impacts the eventual share price.
The company’s stock only becomes tradable publicly after the close of subscription, allocation of the shares, and the real listing on a stock exchange.
Follow-on-public offering (FPO)
A Follow-on Public Offering FPO is when an already listed company issues additional shares for raising additional capital.
Companies raise strategic initiatives like an increase in debt, expansion, and acquisitions through an FPO.
The FPO process begins with filing by an issuer company or its group of entities as a Draft Red Herring Prospectus (DRHP) with SEBI.
When it is passed by SEBI for issuance, the Company initiates a subscription period where the investors can place a bid for newly issued shares.
The final pricing and allocation will be done on the basis of how much they have demanded in that period.
The newly issued shares are then taken to the stock exchange where it enhances the number of shares of the company that are available for trading.
FPOs present an opportunity to invest in a known company with its history of performance, and the investor can benefit from the company’s continued growth and stability.
Difference between IPO and FPO is as follows:
1. Purpose
The most significant reason to undertake an IPO is the raising of large amounts of capital for growth, expansion, or repayment of debt at the time when a company is shifting from being private to public ownership.
An IPO is very crucial to companies that require funding to expand their business operations, enter new markets, or implement large projects that entail massive financial support.
FPOs are issued by existing publicly listed companies to raise funds for specific purposes, such as reducing the existing debt, new project funding, or to strengthen their balance sheet.
In this way, they help companies avoid further debt financing by raising equity capital from the market.
2. Nature of Offering
An IPO is first-time the public is offered company shares where the firm goes public in the stock market.
It is the exact point that transformed the entity from being privately owned to being open to public ownership.
FPO occurs after the company has already become public; it can be said that the issuance of shares is only for additional offering. Such a process can occur several times based on the need for acquiring more capital of the company, but it does not change the public status of the company.
3. Timing
An IPO happens once in a firm’s life cycle because it is the first process of entering the public market.
It is a one-time process that is meant to raise huge amounts of initial capital into public trading.
FPO can be conducted a number of times during the life of a firm after the firm has already been quoted in the public market. FPOs are typically employed strategically.
This happens every time a firm needs additional funds in order to top up growth initiatives or in order to service its debt.
4. Pricing of Shares
During the process of an IPO, the share price is calculated based on the valuation of the company as well as market demand and supply.
It is the first public offer, no previously existing market price exists for shares. Therefore, underwriters carry out thorough analysis regarding which price would make the shares so attractive to initial public investors.
For FPO, the share price is usually fixed at a slight discount to the prevailing market price.
The discounted price makes the offer more attractive to the potential investors, and is also aimed to encourage participation from existing shareholders and new investors.
5. Investor Attraction
The IPO attracts more high-risk, high-reward-seeking investors as they are attracted by growth potential and the newness of entering the public market.
Such investors are willing to take on a degree of uncertainty in hopes of riding the future growth of the company.
FPOs, on the other hand, are more likely to appeal to investors that look at companies with established track records.
Any value-conscious investor who is looking to purchase shares of a company proven in performance will obviously look for stability and security in buying below-market-priced shares through the price advantage of an FPO.
6. Information Availability
As an IPO is the first step a company takes into the public market, its financial information and performance data would be limited. Investors rely primarily on disclosures in the course of an IPO process, which is composed of prospectuses, audited financials, and projections.
Investors will have access to historical financial performance, quarterly earnings, and yearly reports with an FPO, which would help them make decisions based on this data.
This may also be a source of transparency, giving the investors the confidence to better calculate the company’s health in the present as well as its potential future, which happens to be greatly relevant to risk-averse investors.
7. Market Impact
IPOs are likely to cause significant market volatility because a new company is entering the public market, and it often draws attention.
By creating investor speculation and interest through an IPO, it can result in rapid changes of price in case demand begins to outrun supply.
FPOs affect the market to a smaller extent since it is an existing public company that floats additional equity into the market as opposed to a new listing.
An FPO may impact the company’s stock price temporarily, but it tends not to cause nearly the same level of volatility as an IPO does.
8. Liquidity for Existing Investors
An IPO brings liquidity to early investors and founders because their shares can be sold on the public market.
The event is important to private investors and venture capitalists who funded the company in its early stages since they now stand a chance to realize returns on their investments.
In an FPO, what is primarily sought is the generation of funds for projects or fulfilling financing obligations by the company rather than liquidity for existing investors.
Moreover, existing shareholders can indirectly benefit from FPO through improved shareholder value in case the funds raised are used to reduce debt, fuel growth, or improve the financial health of the firm.
9. Perception in the Market
IPOs often serve as a symbol of growth potential and excite some investors. These increased demands from such investors lead to overvaluations in the IPOs.
While this is useful for the company, it does open up the risk of price correction in case it cannot sustain the valuation.
FPOs may serve as an indicator of the future prospects of the company to the market, especially if they are used as strategic investments or for debt redemption.
However, the multiple FPOs may generate concerns from investors because they will think that the timing is for their growth needs instead of a strategic initiative.