Initial Public offer and Follow-on Public offer (IPO and FPO)
Investing in Stock Market Notes
IPO – Initial Public Offer
Initial public offer (IPO) is the most popular method of raising capital by unlisted companies. An unlisted company (which is not listed in any stock exchange) announces IPO when it plans to raise capital through the sale of shares to the public for expansion or repayment of debt or for disinvestment. It is simply a process of selling securities for the first time by an unlisted company to the public in the primary market. To raise capital through an IPO, a public limited company issue prospectus containing information about the company and the terms of issue. The price at which IPO is made is decided by the company after taking into consideration the guidelines issued by the SEBI. Price of an IPO can be fixed or can be fixed through book building process. In book building process, a price range is fixed say 25 to 28, the lower level is called the floor price and upper limit is called cap price and final price is fixed on the basis of applications received from the public.
FPO – Follow-on Public Offer
Follow-on public offer (FPO) is a method of raising capital by companies which are already listed in stock exchange. Process of FPO starts after an IPO. FPO is a further issue of securities to the existing shareholders or public in general or some selected groups with a view to raise additional capital. FPOs are of two types – dilutive offering and non-dilutive offering. In dilutive offering the companies releases more shares to raise more funds. In non-dilutive FPOs, the companies release some of their shares to the public. Price of an FPO is normally near to the market price of the shares.
Difference between IPO and FPO
|Basis||Initial Public Offer (IPO)||Follow-on Public Offer|
|1. Meaning||IPO means issue of securities for the first time by an unlisted company.||FPO means issue of additional securities by a listed company to its existing shareholders or public in general or selected group.|
|2. Issuer||IPO is made by an unlisted company.||FPO is made by a company whose shares are already listed in stock exchange.|
|3. Risk||Risk in IPO is more as compared to FPO.||Risk in FPO is less as compared to an IPO because shares are already traded in stock exchanges.|
|4. Return||Return in case of an IPO can be huge on listing.||Return is less because the price of an FPO is near to the market price of shares.|
|5. Objective||Main objective of an IPO is to raise fresh capital through public investment.||Main objective of an FPO is raise subsequent public investment.|
|6. Listing price||Listing price of an IPO is less predictable.||Listing price of an IPO is more predictable.|
|7. Types||IPO is made for equity and preference shares.||FPO are of two types – dilutive and non-dilutive.|