All the business entities need funds to finance their day-to-day operations and to explore new business avenues or parts. So there are many ways to raise funds for the business and one of them is in the form of equity.
Through equity, companies raise funds by diluting part of their holding and selling in the form of equity shares at a fixed price. The stock which is sold for the first time is referred to as IPO.
On the other hand, When shares are offered for the subsequent public contribution it is referred to as FPO.
IPO (Initial Public Offering):
IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly-traded company by offering its shares to the public for the first time.
The IPO is the very first time a company goes public. This means the company has now offered its shares to the public at large and is ready to get listed at the stock exchanges of the country.
The company will now be a part of the BSE and National Stock Exchange (NSE). The first time a company gets listed at BSE, NSE, or both and offers its shares to be publicly traded, the offering is called an IPO.
A private company that has a handful of shareholders shares the ownership by going public by trading its shares. Through the IPO, the company gets its name listed on the stock exchange.
Why company offers IPO:
Offering an IPO is a money-making exercise. Every company needs money, it may be to expand, to improve their business, to better the infrastructure, to repay loans, etc.
Trading stocks in the open market mean increased liquidity. It opens door to employee stock ownership plans like stock options and other compensation plans, which attracts the talents in the cream layer.
A company going public means that the brand has gained enough success to get its name listed in the stock exchanges. It is a matter of credibility and pride to any company.
In a demanding market, a public company can always issue more stocks. This will pave the way for acquisitions and mergers as the stocks can be issued as a part of the deal.
Types of IPOs :
Fixed Price Offering :
Fixed price offering is pretty straightforward. The company announces the price of the initial public offering in advance. So, when you partake in a fixed price initial public offering, you agree to pay in full.
Book Building Offering :
In book building offering, the stock price is offered in a 20 percent band, and interested investors place their bids. The lower level of the price band is called the floor price, and the upper limit, cap price. Investors bid for the number of shares and the price they want to pay. It allows the company to test interest for the initial public offering among investors before the final price is declared.
FPO (Follow on Public Offer) :
FPO is a process by which a company, which is already listed on an exchange, issues new shares to the investors or the existing shareholders, usually the promoters. FPO is used by companies to diversify their equity base.
The company uses FPO after it has gone through the process of an IPO and decides to make more of its shares available to the public or to raise capital to expand or pay off debt.
Or in other words
An FPO is a process to issue shares to investors on the stock exchange. It is a means of raising additional equity capital to meet the company’s need for running its operations or executing its expansion plans.
Essentially, the FPO meaning is that any public offerings made after the IPO constitutes an FPO.
There are two types of FPOs:
Dilutive offering :
A dilutive FPO is when the company wants to release more shares to collect more funds. This is done to pay off the debts. However, in the case of a dilutive FPO, a company’s value remains unchanged, which results in a decrease in the per-share earnings of the company.
Non-dilutive offering :
In this case, the founders of large shareholders of the company release some of their shares to the public. The money from this goes to the individual offering the shares and not the company. Therefore, the per-share earnings of the company remain unaffected.
The major difference between IPO and FPO:
The objective of an IPO is capital infusion by way of opening up ownership of shares in the company to the public. Whereas The objective of an FPO is to diversify public ownership. FPO may also be issued to dilute the shareholding of the promoters.
Investors have no previous guidance or track record when subscribing to IPO whereas investors have a track record of how the company has performed and previously what the market interest was like. The sales of equity stakes can be a good indicator of whether or not the stock is worth buying.
Investing in an IPO is relatively riskier, and there are more unknowns, FPOs are relatively less risky than IPOs since there is more transparency and information available about the company.