Differences between IPO and FPO: When a company decides to go public, they have to choose between two types of offerings – an Initial Public Offering (IPO) or a Follow-on Public Offering (FPO). Both of these offerings involve selling shares of the company to the public, but there are significant differences between the two. In this blog post, we will explore the differences between IPO and FPO in detail.
IPO (Initial Public Offering):
An IPO is the first time a private company sells shares of its stock to the public. It is a process that allows a company to raise capital by selling ownership of the company to investors. In an IPO, the company issues new shares of stock to the public and the proceeds from the sale go directly to the company. The shares are usually underwritten by investment banks, which help to market and sell the shares to institutional and retail investors.
The process of going public through an IPO is a long and complex one. The company has to file a registration statement with the Securities and Exchange Commission (SEC), which includes detailed information about the company’s financials, operations, and management team. The SEC then reviews the registration statement to ensure that it complies with all the necessary regulations and is accurate and complete.
Once the registration statement is approved, the company can then begin marketing the shares to potential investors. This usually involves roadshows and presentations to institutional investors and high-net-worth individuals. Retail investors can also participate in the IPO through their brokerage accounts.
Types of IPOs in India
In India, there are primarily three types of IPOs, which are:
Fixed Price Issue
In a fixed price issue, the company fixes a price for the shares that are being offered to the public. The price is usually determined after taking into consideration various factors such as the company’s financial performance, market conditions, and the demand for the shares. The investors can subscribe to the shares at a fixed price during the IPO period. The advantage of a fixed price issue is that it provides certainty to the investors about the price they will pay for the shares.
Book Building Issue
In a book-building issue, the company does not fix a price for the shares. Instead, it provides a price band within which the investors can bid for the shares. The price band is usually determined based on the company’s financial performance, market conditions, and demand for the shares. The investors can bid for the shares at any price within the price band. The final issue price is then determined based on the demand for the shares and the bids received from the investors. The advantage of a book-building issue is that it allows the investors to determine the fair value of the shares.
In a rights issue, the company offers additional shares to its existing shareholders in proportion to their existing shareholding. The shareholders have the right to subscribe to the additional shares at a discounted price. The advantage of a rights issue is that it allows the company to raise capital without diluting the ownership of the existing shareholders. It also provides an opportunity for the existing shareholders to increase their stake in the company at a discounted price.
In addition to the above three types of IPOs, there is also a Qualified Institutional Placement (QIP) which is a private placement of shares to qualified institutional buyers such as banks, mutual funds, and insurance companies. QIPs are not considered as an IPO as they are not offered to the public. QIPs are typically used by companies to raise capital quickly without going through the lengthy process of an IPO.
FPO (Follow-on Public Offering):
An FPO, also known as a Secondary Public Offering, is a process by which a company that has already gone public sells additional shares to the public. Unlike an IPO, where the company issues new shares, in an FPO, the shares being sold are already in circulation. This means that the proceeds from the sale go directly to the shareholders who are selling their shares, rather than to the company.
FPOs can be used for a variety of reasons. A company may decide to sell additional shares to raise capital for expansion or to pay off debt. Shareholders may also decide to sell their shares to cash out their investment in the company. FPOs are usually underwritten by investment banks, which help to market and sell the shares to institutional and retail investors.
Types of FPOs in India
In India, there are two types of Follow-on Public Offerings (FPOs) that a company can opt for to raise additional capital from the public. These are:
Dilution of promoter’s stake
A company can opt for an FPO to dilute the promoter’s stake in the company. Promoters are the major shareholders in the company, and an FPO can be used to sell a part of their holdings to the public, thereby reducing their stake in the company. This type of FPO is also known as an Offer for Sale (OFS) as the shares are offered for sale by the promoters to the public. The proceeds from the sale of shares go directly to the promoters, and not to the company.
Issuance of additional shares
A company can also opt for an FPO to issue additional shares to the public. This is done when the company requires more capital for expansion, acquisitions, or other corporate purposes. In this type of FPO, the company issues new shares of stock to the public, and the proceeds from the sale go directly to the company. This type of FPO is also known as a fresh issue.
It is important to note that companies opting for an FPO in India are required to comply with the regulatory requirements of the Securities and Exchange Board of India (SEBI), which includes the filing of a draft red herring prospectus and other disclosures. The FPO process in India is similar to that of an IPO and involves various steps, including underwriting, book-building, and listing on the stock exchanges.
Key Differences between IPO and FPO
The key difference between an IPO and an FPO is the timing of the offering. An IPO is the first time a company goes public, while an FPO is a subsequent offering made by a company that has already gone public.
The purpose of an IPO is to raise capital for the company by issuing new shares of stock to the public. The purpose of an FPO is to provide liquidity to existing shareholders by allowing them to sell their shares to the public.
In an IPO, the company issues new shares of stock to the public, which means that the company’s ownership structure changes. In an FPO, the shares being sold are already in circulation, which means that the ownership structure of the company does not change.
In an IPO, the proceeds from the sale of shares go directly to the company. In an FPO, the proceeds from the sale of shares go directly to the shareholders who are selling their shares.
The regulatory requirements for an IPO are more extensive than those for an FPO. This is because an IPO involves the issuance of new shares of stock, which requires a more detailed registration statement and more extensive disclosures. An FPO, on the other hand, involves the sale of shares that are already in circulation, which requires less extensive disclosures.
The marketing process for an IPO is usually more extensive than that for an FPO. This is because an IPO is a company’s first time going public and requires more effort to generate interest from potential investors. Roadshows and presentations to institutional investors and high-net-worth individuals are common during an IPO. On the other hand, an FPO is typically marketed to existing shareholders and institutional investors who are already familiar with the company.
In conclusion, IPOs and FPOs are two different ways for companies to raise capital from the public. IPOs are the first time a company goes public and involve the issuance of new shares of stock to the public. FPOs, on the other hand, are subsequent offerings made by a company that has already gone public and involve the sale of shares that are already in circulation.
While both IPOs and FPOs involve selling shares of stock to the public, there are significant differences between the two in terms of purpose, timing, ownership, proceeds, regulatory requirements, and marketing. It is important for companies to carefully consider which option is best for them based on their specific needs and circumstances.