When a company decides to go public and offer its shares to the public, it has two options: an Initial Public Offering( IPO) and a Follow-on Public Offering( FPO). While both IPOs and FPOs are ways for companies to raise capital by issuing shares, they have significant differences in terms of their purpose, process, and issues. In this blog post, we will discuss the differences between an IPO and an FPO and which one is better for companies looking to raise finances.
What is an IPO?
An Initial Public Offering( IPO) is the first time a company offers its shares to the public and gets listed on the stock exchange. It’s a way for a private company to raise funds by selling a portion of its power to the public. In an IPO, the company issues new shares, and the proceeds from the trade of those shares go directly to the company, which it can use to expand its business or pay off debts. The IPO process involves several steps, including negotiating with investment bankers, filing a registration statement with the Securities and Exchange Commission (SEC), and determining the original sacrifice price. Once the company goes public, its shares are privately traded on the stock exchange, and investors can buy and sell the shares.
What is an FPO?
A Follow-on Public Offering( FPO) is a type of public offer in which a company that was previously listed on the stock exchange issues new shares to the public to raise fresh capital. In an FPO, the company sells shares held by its promoters, major shareholders, or the company itself. The proceeds from the trade of these shares go directly to the shareholders, and the company does not admit any finances from the trade of shares. An FPO can be dilutive to the shareholders’ power stake since the number of outstanding shares increases, but it can also help the company raise finances without taking on debt. An FPO can also increase the liquidity of the company’s shares and attract further investors.
IPO vs. FPO
The main difference between an IPO and an FPO is the purpose for which they are issued. An IPO is issued when a company is going public for the first time and wants to raise finances by issuing new shares, whereas an FPO is issued when a company wants to raise fresh capital by dealing in shares.
Another difference is the process involved in issuing an IPO and an FPO. An IPO requires a more rigorous process, including filing a registration statement with the SEC, negotiating with investment bankers, and determining the original sacrifice price. In distinction, an FPO is a less complicated process since the company was previously listed on the stock exchange, and it does not need to file a registration statement with the SEC.
The pricing of an IPO and an FPO also differs. In an IPO, the company determines the original sacrifice price based on several factors, including its financial performance, request conditions, and demand for its shares. In distinction, the pricing of an FPO is determined by request forces, and the company has little control over the pricing.
DILUTIVE FPO A dilutive FPO is a type of FPO that can cause a drop in the value of shares. This occurs when the new shares issued in the FPO increase the total number of outstanding shares, lacing the power and earnings per share of shareholders.When a company decides to raise fresh finances through a dilutive FPO, it issues new shares at a lower price than the requested price. This is because the company wants to attract investors to buy the new shares, and offering them at a discount can help achieve this goal. Still, the increase in the total number of outstanding shares can lead to a drop in the earnings per share and the overall value of shares. Shareholders may feel unhappy about the dilution caused by a dilutive FPO as their power stake and earnings per share can drop. Still, dilutive FPOs are occasionally necessary for companies to raise capital for expansion or other strategic enterprise. Investors considering investing in a dilutive FPO should precisely estimate the implicit benefits and pitfalls of such an investment. They should also consider the company’s fiscal health, growth prospects, and the implicit impact of the dilution on shareholders.
Depository Participants are an integral part of the securities request in India. They’re realities that grease the electronic holding of securities, such as stocks and bonds, on behalf of investors. DPs play an important role in the original Public Offerings( IPOs) and Follow- on Public Offerings( FPOs) in India. In an IPO or FPO, a company issues new shares of its stock to the public or to shareholders. DPs help investors share in these immolations by easing the transfer of shares between the company and the investor.
For example, during the IPO of Zomato in 2021, investors who wanted to participate in the immolation were required to have a Demat account with a DP. The Demat account holds the investor’s electronic securities, including shares bought through the IPO. In this case, the DPs eased the transfer of shares from the company to the investors through the Demat account.
Also, during the FPO of SBI Cards in 2020, investors who held shares in the company were eligible to participate in the immolation through their Demat accounts with DPs. The DPs eased the transfer of shares from the investors’ Demat accounts to the company, allowing them to sell their shares in the FPO. DPs also play a part in ensuring the delicacy of share transfers and maintaining records of share power. They help grease the buying and selling of shares on stock exchanges and provide other services related to securities trading and power.
In India, there are two main depositories, the National Securities Depository Limited( NSDL) and the Central Depository Services( India) Limited( CDSL), which are regulated by the Securities and Exchange Board of India( SEBI). These depositories have a network of DPs across the country, providing investors with easy access to electronic securities holding and trading services. In conclusion, DPs play a pivotal role in the IPO and FPO processes in India by easing the transfer of shares between companies and investors, ensuring the delicacy of share transfers, and maintaining records of share power. They provide an accessible and effective way for investors to participate in securities offerings and access electronic securities holding and trading services.
Which is better, an IPO or FPO?
Deciding whether to go for an IPO or an FPO depends on the company’s pretensions, financial performance, and request conditions. There are also some factors to consider when choosing between an IPO and an FPO. If the company is going public for the first time, an IPO is the way to go. On the other hand, if the company wants to raise fresh capital without taking on debt, an FPO is a good option. Financial Performance Companies with strong financial performance are more likely to have a successful IPO. In distinction, companies with weaker financial performance may find it challenging to attract investors. In the world of finance, there are several ways for companies to raise capital.
One of the most popular ways is to offer shares to the public and become a privately traded company. Two of the most common ways of doing this are through an Initial Public Offering( IPO) and a Follow-on Public Offering( FPO).
One crucial difference between an IPO and an FPO is timing. An IPO is done when a company is going public for the first time, while an FPO is done when a company was previously privately traded and wants to raise fresh capital. The process for an IPO can be more complex and time- consuming, as the company is essentially starting from scratch in terms of preparing financial statements and nonsupervisory forms. In distinction, an FPO can be a simpler process as the company has already gone through the original public sacrifice process.
Success Stories
Initial Public Offerings ( IPOs) and Follow- on Public offerings ( FPOs) have been an important source of capital for companies in India. Then are some of the most successful IPOs and FPOs in India in recent times
Reliance Industries Limited( RIL)– In 2020, RIL raised over Rs 53,124 crore through a series of FPOs. This was one of the largest capital raising exercises by any company historically.
Avenue Supermarts Limited– In 2017, the driver of the supermarket chain DMart raised Rs 1,870 crore through an IPO. The issue was oversubscribed by 105 times, making it the most successful IPO in over a decade.
Indian Railway Finance Corporation( IRFC)– In 2021, the Indian Railway Finance Corporation raised Rs 4,600 crore through an IPO. The issue was oversubscribed by over three times, despite being launched during the epidemic.
SBI Cards and Payment Services In 2020, SBI Cards raised Rs 10,354.75 crore through an IPO, making it the fifth- largest IPO in India. The issue was oversubscribed by 26 times.
HDFC Asset Management Company– In 2018, the asset operation arm of HDFC Bank raised Rs 2,800 crore through an IPO. The issue was oversubscribed by 83 times, making it one of the most successful IPOs in India.
Coal India Limited– In 2010, Coal India raised Rs 15,199 crore through an IPO, making it the largest IPO in India at that time. The issue was oversubscribed by 15 times.
ICICI Prudential Life Insurance– In 2016, the life insurance company raised Rs 6,057 crore through an IPO. The issue was oversubscribed by 10 times.
These successful IPOs and FPOs demonstrate the investor appetite for quality companies with strong fundamentals and growth prospects
