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IPO vs FPO is a common comparison among investors looking to participate in a company’s journey through the stock market. While an Initial Public Offering (IPO) marks the first time a private company offers its shares to the public, a Follow-on Public Offering (FPO) allows an already listed company to issue additional shares to raise more capital.
Keep reading to learn more about how IPO differs from FPO.
Key Takeaways
- IPOs are generally launched by private companies entering the stock market for the first time, while FPOs are issued by already listed companies.
- Investors usually have more historical data when analyzing an FPO than an IPO.
- Companies use IPOs mainly for expansion, business growth, and raising fresh capital, whereas FPOs may also be used to reduce debt or improve financial flexibility.
- An FPO can either increase the number of outstanding shares or allow existing shareholders to sell their holdings.
- The success of both IPOs and FPOs depends on factors such as company fundamentals, valuation, market conditions, and investor sentiment.
What is an IPO in the Share Market?
An Initial Public Offering (IPO) is the process through which a privately owned company offers its shares to the public for the first time. After completing the IPO process, the company gets listed on a stock exchange, allowing investors to buy and sell its shares.
Before an IPO, a company’s ownership is generally limited to founders, private investors, venture capital firms, and other stakeholders. By launching an IPO, the company opens ownership to retail investors, institutional investors, and other market participants.
Companies usually launch IPOs to raise funds for several purposes, including:
- Expanding business operations
- Developing new products and services
- Repaying existing debt
- Funding acquisitions
- Providing an exit opportunity to early investors
For example, Indian Railway Catering and Tourism Corporation (IRCTC) launched its IPO in 2019. The issue attracted strong investor interest because of the company’s strong position in railway ticketing, catering, and tourism services.
Once listed, the company’s shares start trading on exchanges such as NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).
Note: Both IPOs and FPOs can be structured either as a Fresh Issue (where the company issues brand-new shares to raise primary capital for its own operations) or an Offer for Sale (OFS) (where existing promoters or early investors sell their pre-existing stake, with proceeds going directly to the selling shareholders rather than the company's balance sheet).
What are the Different Types of IPOs?
Companies generally use three major types of IPO structures:
Fixed Price IPO
In a fixed-price IPO, the company sets the price at which it offers shares to investors before opening the issue.
The issue price is determined after considering factors such as:
- Company valuation
- Financial performance
- Industry outlook
- Market conditions
Investors know the exact share price before applying.
Book Building IPO
A book-building IPO allows investors to bid within a specified price range instead of offering shares at a fixed price.
The company announces a price band, and investors submit bids based on:
- Number of shares they want
- Price they are willing to pay
After collecting bids, the company and investment bankers determine the final issue price based on demand.
Most IPOs in India follow the book-building method.
Dutch Auction IPO
In a Dutch auction IPO, investors place bids mentioning the number of shares they want and the price they are willing to pay.
The final price is set by investor demand, and successful bidders receive shares at that price.
However, this method is rarely used in India.
What is an FPO in the Stock Market?
A Follow-on Public Offering (FPO) is when an already listed company issues additional shares to the public after completing its IPO.
While IPO pricing is determined through valuation expectations and price discovery bands, FPO issue prices are typically set at a strategic discount to the Current Market Price (CMP) on stock exchanges to attract investor interest and incentivize participation.
Companies launch FPOs to raise additional funds for purposes such as:
- Business expansion
- Reducing debt
- Improving liquidity
- Meeting regulatory requirements
- Strengthening the balance sheet
As the company is already listed, investors can analyze its past financial performance, share price movements, management decisions, and market reputation before investing.
For example, Ruchi Soya Industries launched an FPO in 2022 to raise funds for debt repayment, working capital requirements, and general corporate purposes.
What are the Different Types of FPOs?
FPOs are mainly divided into two categories:
Dilutive FPO
A dilutive FPO involves the company issuing new shares to investors.
Since the total number of outstanding shares increases, existing shareholders may experience dilution of their ownership percentage.
For example:
- A company has 10 lakh shares before an FPO.
- It issues 2 lakh new shares through the FPO.
- Total shares become 12 lakh.
- Existing shareholders now own a smaller percentage of the company unless they participate in the FPO.
Non-Dilutive FPO
A non-dilutive FPO occurs when existing shareholders, such as promoters or large investors, sell their shares to the public.
The company does not issue new shares in this case, so the total number of outstanding shares remains unchanged.
This allows existing investors to exit partially while improving public shareholding.
How is IPO Different From FPO?
Although both IPOs and FPOs involve companies raising money from public investors, their purpose and structure are different.
|
Feature |
IPO |
FPO |
|
Full form |
Initial Public Offering |
Follow-on Public Offering |
|
Meaning |
First public issue of shares by a private company |
Additional share issue by an already listed company |
|
Company status |
Private company becoming public |
Already publicly listed company |
|
Purpose |
Raise capital and enter stock markets |
Raise additional funds after listing |
|
Investor information |
Limited historical market data available |
More financial and market data available |
|
Risk level |
Generally higher due to limited track record |
Comparatively lower due to existing track record |
|
Pricing |
Usually based on valuation expectations |
Often influenced by existing market price |
|
Regulatory process |
More extensive |
Relatively simpler |
Why do Companies Choose IPOs?
Companies choose IPOs when they want to access public capital markets and increase their growth potential.
Some major reasons include:
Raising Growth Capital
An IPO provides companies with access to a large pool of investors. The funds raised can support expansion plans, technology upgrades, research, and acquisitions.
Improving Brand Visibility
Listing on stock exchanges often increases a company’s credibility among customers, investors, and business partners.
Providing Exit to Early Investors
An IPO allows venture capital firms and early investors to sell part of their holdings and realise returns.
Why do Companies Launch FPOs?
Companies generally launch FPOs when they identify additional funding needs.
Some common reasons include:
Funding Expansion Plans
A company may need more capital after listing to expand operations, enter new markets, or increase production capacity.
Reducing Debt
FPO proceeds can help companies repay loans and improve their financial position.
Increasing Public Shareholding
Companies frequently utilise non-dilutive FPOs or Offers for Sale (OFS) specifically to comply with SEBI’s 25% Minimum Public Shareholding (MPS) rule, ensuring that listed entities maintain the mandated level of public float and market liquidity.
Regulatory process & Fast-Track FPO
FPO regulatory processes are generally simpler for eligible companies. Specifically, SEBI’s Fast-Track FPO framework allows well-compliant listed companies to raise capital much faster by bypassing lengthy draft prospectus review and approval cycles with regulatory bodies.
Should Investors Prefer IPOs Or FPOs?
There is no fixed answer because IPOs and FPOs serve different investment needs.
An IPO may appeal to investors looking for early participation in a growing company. However, investors must carefully analyse factors such as:
-
Business model
-
Revenue growth
-
Profitability
-
Competitive advantage
-
Valuation
An FPO may provide greater transparency because the company already has a public track record. Investors can review financial statements, historical stock performance, and management decisions before investing.
However, a strong company does not automatically make every IPO or FPO attractive. Valuation remains a key factor. Even a good business can deliver poor returns if investors pay too high a price.
What Factors Should You Check Before Investing in IPOs or FPOs?
Before investing in any public issue, investors should evaluate:
Company Fundamentals
Check revenue growth, profitability, debt levels, business model, and future growth opportunities.
Valuation
Compare the company’s valuation with competitors in the same sector to determine whether the issue price appears reasonable.
Purpose of Fund Raising
Understand why the company is raising money. Funds used for expansion may indicate growth plans, while debt repayment may indicate financial restructuring.
Market Conditions
Broader market sentiment can influence listing performance and post-listing returns.
Promoter Background
Review promoter credibility, management experience, and corporate governance standards.
Conclusion
IPO and FPO are important tools that allow companies to raise funds from public investors, but they represent different stages of a company’s market journey. An IPO marks the beginning of a company’s public ownership, while an FPO helps an already listed company raise additional capital. For investors, the choice between an IPO and an FPO should depend on research, not market excitement. While IPOs may offer opportunities to invest in emerging businesses, FPOs provide the advantage of analysing an established company’s financial history.
