IPO vs FPO: 5 Key Differences Every Investor Must Know

Investors should be aware of the IPO vs FPO distinctions, as there are several critical differences between the two. Understanding IPO and FPO differences as a beginner, as well as a professional equity trader, can be a make-or-break consideration. When a company chooses to raise large amounts of capital through the public market, and just as the financial world is beginning to open up to them, there is a great deal of confusion when the terms IPO and FPO are used.

This blog will answer what IPO and FPO are, focus on IPO vs FPO meaning, and explain the FPO full form (which is Follow-on Public Offer). Besides providing examples of each, we will analyse the pros and cons, and offer suggestions to facilitate the understanding of the 5 differences between an IPO and an FPO. This means that we intend to make it easy for readers to identify the effect of an FPO as opposed to an IPO.

What is IPO? Understanding the Concept

An Initial Public Offering (IPO) is the process through which a given company first offers its shares to the public. This process not only involves selling shares to the public, but it also involves the company first becoming a public company.

Companies go for an IPO (Initial Public Offering) to raise large amounts of money to fund future business strategies, to pay off debts, or to repurpose existing cash. It’s like a “coming out” for the company, giving them an official introduction to the financial world. Underwriters, usually investment banks, set the price at which the investors can buy their shares. 

Giving IPOs Their Due:

- Fresh Entry: No history of previous public trading. 

- Sufficient Intricacies: Government Regulators like SEBI (Securities and Exchange Board of India) require a lot of detailed disclosures. This ends up with the company preparing a Draft Red Herring Prospectus (DRHP).- Price Discovery: They usually do this through book building, which means the final price will be determined by the range of bids.

In 2020, Reliance Jio had India’s biggest IPO at the time, raising ₹53,000 crore. The following year, Zomato’s public IPO received huge attention from retail investors. 

Becoming a public company can be very lucrative. Zomato shares increased by 65% the first day of trading! However, the opportunity did attract a lot of risk for investors because the company’s true public market value was unknown.

 

 

What is FPO? The Expanded FPO Form

FPO full form is Follow-on Public Offering. This type of public offering is unlike an IPO because the company is already public. It’s a second round of raising funds, and in this case, the existing shareholders (promoters, or institutions) or the company itself will dilute more shares to the market.

FPOs assist listed companies in accessing market liquidity without losing any prior work. They can either issue new shares (dilutive FPO) or sell previously issued shares (non-dilutive FPO). This is common when companies need immediate financing for acquisitions, R&D, or to survive an economic downturn.

Key features of an FPO include

1. - Post-listing event: Leveraging market visibility.
2. - Pricing: Usually below market value to entice participation. 
3. - Less stringent regulations: Given that a company is already public, it will have less regulatory paperwork to complete than it would at an IPO. 

Yes Bank is perhaps the most notable example, having secured funding for a Rs. 15,000 Cr FPO in the middle of the economic downturn. Their funding rounds have also contributed to the operational financing of Coal India, among other less recognised FPOs. 

FPOs provide a means of managing risk and getting a return to long-term shareholders when the market is mispricing the companies.

In this section, we will cover the difference in meaning between IPO and FPO

IPO vs FPO meaning

The difference in meaning revolves around time and intent. An IPO is a new public offering for a company that is new to the market, while an FPO is a subsequent offering for a company that is already established.

Aspect	IPO (Initial Public Offering)	FPO (Follow-on Public Offer)
Timing	First public share sale	Subsequent sale after IPO
Company Stage	Private turning public	Already publicly listed
Purpose	Major expansion, listing	Additional funds, debt reduction
Risk Level	High (unproven track record)	Lower (market history available)
Investor Appeal	Speculative, high upside potential	Value-driven, often discounted

 

The table depicts the differences between IPO and FPO, notably highlighting why FPOs are often overlooked while IPOs are in the news.

5 Key Differences: IPO vs FPO Breakdown

The FPO vs IPO discussion centres on 5 distinct aspects. Each difference influences your expectations - IPOs are growth plays and FPOs are value investments.

1. Timing and Company Lifecycle

The most significant difference between IPO and FPO is the timing. On the one hand, an IPO is the first time a company goes public. Once a company has secured private funding from venture capitalists or angel investors, an IPO is the ultimate milestone.

On the other hand, FPOs happen months or years after an IPO. Companies utilise FPOs when they need additional cash without the need for an IPO's publicity. For example, LIC's 2022 IPO was a significant event; however, an FPO could be considered for the future.

Investor takeaway: Aggressive investors focus on IPOs; FPOs are for investors with a more cautious approach with consistent cash flows.

2. Purpose and Allocation of the Funds

IPOs most often support significant growth initiatives, such as new construction, technological advancements, or new markets. These funds are added straight to the firm's balance sheet.

FPOs address various objectives of promoters offloading stakes (like in dilution sales) or companies filling cash gaps. The FPO full form emphasises this ‘follow-on’ nature; it’s not the primary debut.

Tata Steel’s FPO in 2009 is an example; it focused on raising funds for acquisitions as opposed to its IPO’s expansion focus. The IPO vs FPO meaning shift for this case suggests that IPOs represent future focus while FPOs represent current focus.

3. The Shifting Dynamics of Risk and Valuation

IPOs tend to be higher risk; with little trading history, they’re listed on the exchange with little regard to how volatile the listing may be. High-profile IPOs like Paytm (2021) are an example, with their listing valuation being too high and crashing soon after.

FPOs can better take advantage of market information and are often listed at more attractive pricing. They are often listed at a sub 10% to 15% discount. However, too many FPOs can indicate a lack of funds available, as with multiple rounds of fundraising for Vodafone Idea.

Pro Tip: Compare the price-to-earnings ratios. IPOs generally trade at a significantly higher premium, 20-50 times, while FPOs trade much closer to their peers at around a 10-20 times multiple.

 

 

4. Regulatory and Compliance Costs

An IPO demands more rigorous compliance; the approvals from SEBI, the roadshows, and the audits take 6-12 months in total. They are required to disclose which litigation/bureaucratic risk assessment relates to promoters’ holdings.

FPOs describe a simpler process. They take a shorter time (approximately 2-3 months) and rely on the outstanding filings. The processes are streamlined and in high-volume markets, the total costs are lower, a form of IPO vs FPO advantage to the issuer.

In India, SEBI’s 2023 regulations have relaxed the process for FPOs, enhancing their attractiveness.

5. Potential for Returns and Investor Involvement

Retail investors are jumping in on the hype surrounding new IPOs (Initial Public Offerings) through HDFC ASBA (Applications Supported by Blocked Amount) and IPO lottery systems. 

These IPOs have been known to experience oversubscription by as much as 100 times, such as with Kalyan Jewellers. Listing gains are around 20-30% in bullish trends, though they can experience considerable losses and go downhill fast.

FPOs (Follow-on Public Offerings) have an institutional offering, which can contribute to less excitement. Listing gains occur on a steadier basis (5-15%) but still rely heavily on the fundamentals.

Data indicates that, in the long run (3-5 years), FPOs > IPOs. If you are looking to make a quick profit, go for IPOs; for long-term benefits, go for FPOs.

Pros and Cons: FPO vs. IPO for Investors

Advantages of IPOs

1. - Great first-day pre-market auctions.
2. - They allow access to blue-chip securities.
3. - Generic (massive) liquidity provided to the firm.
   
   

Disadvantages 

Misleading premiums on the grey market and lock-in periods complicate exits.

FPO Advantages

1. - Average financing of the firm ratios.
2. - Price is more fixed and predictable.
3. - There are often lower barriers.

Disadvantages

Dilution erodes EPS; it may signal financial weakness.

Real World Example

- FPO: Adani Enterprises issued an FPO in 2023 and more than 90% of the shares were sold on the first day.

- FPO: State Bank of India 2007 FPO that was selling to post-crisis on the American subprime.

- Cautionary Tales: FPO dilution in DLF and IPO flop, as in the case of the stalled debut of the NSE. These examples illustrate differences between FPOs and IPOs.

Investment Guide IPO vs FPO Steps

1. Research: Study the RHP/DRHP found on the BSE/NSE sites. Try to assess the IPO vs FPO meaning using peer comparisons.

2. Apply: For IPOs, use UPI/ASBA; for FPOs, use demat.

3. Time: For IPO allotments, bid high; for FPOs, watch the discounts.

4. Diversify: Invest 5-10% of your portfolio into fresh issuances.

5. Track: For live tracking, use apps like Groww or Zerodha.

In India, mastering this is crucial given the 200+ IPOs predicted for 2024.

 

 

Conclusion

Summarising the most important part, mastering the differences between FPOs and IPOs is essential in understanding the markets. In short, the differences between IPO and FPO provide you the ability and understanding to invest with confidence in the markets. While FPOs provide the potential thrill and rewards,

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.