When companies decide to raise capital through public markets, they can do so through either Initial Public Offerings (IPOs) or Follow-on Public Offerings (FPOs). Understanding the key differences between IPOs and FPOs is crucial for investors looking to navigate the complexities of the Indian stock market. Let’s delve into the difference between IPO and FPO, and explore the advantages of IPO.
What Is an IPO?
An Initial Public Offering (IPO) is the process through which a private company offers its shares to the public for the first time. This transition converts the private entity into a public company, allowing it to be listed on a recognized stock exchange like the NSE or BSE in India.
Key Features:
- Capital Injection: IPOs provide the company with new capital, which can be used for various purposes such as expansion, debt repayment, or research and development.
- Shareholder Diversification: IPOs diversify the ownership structure by inviting new shareholders into the fold.
- Regulatory Scrutiny: IPOs involve rigorous regulatory scrutiny by entities like SEBI (Securities and Exchange Board of India).
Advantages of IPO:
An Initial Public Offering (IPO) provides companies with the ability to raise significant capital, fueling growth and expansion. It also boosts the company’s market visibility, credibility, and valuation. Additionally, IPOs offer early investors the chance to sell their shares at a profit. These are some key advantages of IPO.
- Access to Capital: Companies can raise substantial amounts of money to fuel growth initiatives.
- Market Visibility: Being listed publicly enhances the company’s visibility and credibility.
- Exit Strategy: For early investors and employees, IPOs offer an exit route by enabling them to sell their shares in the open market.
What Is an FPO?
A Follow-on Public Offering (FPO) occurs when an already listed company issues additional shares to the public to raise more capital. FPOs can be classified into two types: dilutive and non-dilutive. In a dilutive FPO, the company issues new shares, thus reducing the value of existing shares. In a non-dilutive FPO, existing major shareholders sell their shares.
Key Features:
- Additional Capital: Similar to IPOs, FPOs provide companies with additional capital for various strategic initiatives.
- Existing Market Presence: Since the company is already listed, the risk perception among investors tends to be lower compared to IPOs.
- Regulatory Requirements: FPOs, like IPOs, are subject to regulatory scrutiny.
Difference Between IPO and FPO
The difference between an IPO and an FPO lies in their purpose and timing. An Initial Public Offering (IPO) occurs when a company offers its shares to the public for the first time to raise capital and become publicly listed. On the other hand, a Follow-on Public Offering (FPO) happens when a company that is already listed issues additional shares to raise more funds. While IPOs introduce a company to the stock market, FPOs help existing companies expand their capital.
1. Stage of the Company:
– IPO: Marks the company’s debut in the stock market.
– FPO: Conducted by companies already listed on the stock exchange.
2. Risk Profile:
– IPO: Generally considered riskier because investors do not have prior market performance to review.
– FPO: Seen as less risky since the company has an existing track record in the stock market.
3. Purpose:
– IPO: Primarily aimed at raising capital for growth, diversification, or debt reduction.
– FPO: Often aimed at raising additional capital for expansion or to correct the company’s balance sheet.
4. Investor Confidence:
– IPO: Attracts investor attention but requires thorough scrutiny since it is untested in the public domain.
– FPO: Typically enjoys higher investor confidence due to the company’s existing operational history on the stock market.
Calculations Related to IPO and FPO in INR
Sample Scenario for an IPO:
Imagine a private tech company named “Tech Innovations Ltd.” decides to go for an IPO. The company plans to issue 10 million shares at an offer price of INR 100 each.
– Total Capital Raised: 10,000,000 shares * INR 100/share = INR 1,000,000,000
Sample Scenario for an FPO:
Suppose a public pharmaceutical company, “Health First Ltd.,” decides to conduct a dilutive FPO by issuing an additional 5 million shares at the current market price of INR 150 per share.
– Total New Capital Raised: 5,000,000 shares * INR 150/share = INR 750,000,000
In both scenarios, the capital raised can be instrumental in fulfilling the company’s strategic objectives.
Conclusion
Both IPOs and FPOs offer unique advantages to companies seeking to raise capital, and each comes with its set of risks and rewards. The difference between IPO and FPO primarily lies in the stage and risk profile of the company, and the purpose behind raising additional funds.
While IPOs bring in new shareholders and fresh capital, enhancing market visibility, FPOs offer a way for already listed companies to secure additional funds, generally with lower risk profiles compared to IPOs.
Investors need to carefully gauge all pros and cons before deciding to participate in either an IPO or an FPO. It is essential to conduct thorough due diligence and consult financial advisors if necessary.
Disclaimer:
Investing in the Indian stock market involves risks. Potential investors must carefully evaluate all aspects and consult with financial advisors before making investment decisions based on IPOs or FPOs. This article is intended for informational purposes only and should not be considered as financial advice.
