IPO vs FPO: Key Difference Between FPO and IPO

An IPO (Initial Public Offering) is when a company offers its shares to the public for the first time, becoming publicly traded on a stock exchange. In contrast, an FPO (Follow-on Public Offering) occurs when a company that is already listed issues additional shares to raise more capital. While an IPO introduces a company to the public market, an FPO helps an established company expand its capital.

What is an IPO (Initial Public Offering)?

An Initial Public Offering (IPO) is a process by which a privately held company offers its shares to the public for the first time to get listed in the secondary market. This transition from a private to a public entity allows the company to raise capital from investors by selling its existing stake and offering new issues.

Types of IPOs

• Fixed Price IPO: In the fixed IPO process the company sets a specific price for their shares, and investors need to purchase those shares at that fixed price.
• Book-Building Process: In the book-building process, the company fixes a price band, and investors should bid within that range in multiple lots. The listing price is determined based on demand and supply dynamics.
• Hybrid Offering: Hybrid offering comes with the Combination of elements of both fixed price and book building methods.

Segments of IPO

Main Board IPOs and SME IPOs refer to two distinct segments of the IPO segment, which differ in terms of the company size that list their shares and the scale of the offering. Here’s a detailed explanation of each

Main Board IPO

Main Board IPOs refer to companies that list their shares on the primary stock exchanges (like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). These companies are usually large, well-established businesses that meet stringent requirements by SEBI.

Characteristics:

• Larger Companies: The Main Board IPOs are larger and more established companies with a strong proven track record, steady revenue, and profits.
• Higher Listing Standards: These companies must meet stricter financial, corporate governance, and operational criteria set by the stock exchanges and SEBI.
• Bigger Fundraising: The IPO size in the Main Board is usually large, and often raise bigger funds for their IPOs as compared to SME IPOs.
• Investor Base: These offerings attract institutional investors, retail investors, high-net-worth individuals (HNIs), and Angel Investors.
• Regulatory Requirements: Companies must adhere to higher disclosure and compliance standards to be listed on the Main Board. This includes financial audits, detailed prospectus filing (DRHP, RHP), and other stringent regulations.
• More Liquidity: As these companies are larger and have a wider shareholder base, their stocks tend to be more liquid when it got listed on the exchange, meaning they can be bought and sold more easily in the market without any volatility issues.

Example:

• A well-established company like Swiggy or NTPC Green Energy has issued an IPO on the Main Board.

SME IPOs (Small and Medium Enterprises)

SME IPOs are designed for small and medium-sized enterprises that wish to raise capital through the public, but they may not be able to meet the stringent listing criteria required for the Main Board. These companies list their shares on a separate segment of the exchange, specifically aimed at smaller businesses. In India, the BSE SME and NSE Emerge platforms are examples of exchanges offering a segment for SME IPOs.

Characteristics

• Smaller Companies: SME IPOs are typically launched by smaller, emerging companies with limited operating history or that are in the early stages of growth and are looking for funds for their expansion.
• Less Stringent Regulations: The listing requirements for SME IPOs are more relaxed compared to the Main Board. This allows smaller businesses to access public capital without meeting the same financial thresholds as larger companies on the Main-board.
• Lower Capital Raised: The fundraising amount is usually much smaller compared to Main Board IPOs. Typically, SMEs raise smaller sums in the range of a few million to tens of millions of rupees.
• Target Investor Base: SME IPOs primarily target retail investors and smaller institutional investors, as they offer more accessible entry and exit points compared to large Main Board IPOs.
• Higher Risk: Investing in these SME IPOs is considered often riskier, as the businesses involved might have less proven business models and a higher potential for failure.
• Less Liquidity: SME stocks generally have lower liquidity than those listed on the Main Board, which may make it harder to buy or sell quickly.

Example:

• Some companies like HP Telecom India Ltd. And Tejas Cargo India Ltd. had come to IPO in SME seeking to expand their wings on the BSE SME or NSE Emerge platform.

Key Differences Between Main Board and SME IPOs

Significance for the Company

• Capital Raising: An IPO enables the company to secure substantial funds for its expansion, debt reduction, or other strategic initiatives.
• Public Recognition: Listing on a stock exchange enhances the company's visibility and credibility, potentially attracting more customers and partners which leads to an increase in their brand value.
• Exit Strategy: Founders, Promotors, and early investors can monetize their holdings, realizing returns on their investments.
• Employee Benefits: Public companies can offer stock options, serving as an incentive and retention tool for employees, which they can sell after listing upon standard terms.

Significance for Investors

• Investment Opportunities: IPOs provide investors with the chance to invest in a company at an early stage of its public life, potentially leading to significant returns over the period.
• Diversification: Investing in IPOs allows investors to diversify their portfolios with new and potentially high-growth companies.
• Risks: IPOs can be more volatile, and there is a risk of losing money if the stock price doesn’t perform as expected.

What is an FPO (Follow-on Public Offering)?

A Follow-on Public Offering (FPO) occurs when a company that is already publicly listed issues additional shares to raise more capital. This can be done through a dilutive or non-dilutive offering.

Types of FPOs:

1. Dilutive FPO: in case of a Dilutive IPO the company issues new shares, increasing the total number of shares outstanding, which can dilute the value of existing shares.
2. Non-Dilutive FPO: Existing shareholders like promoters sell their shares to the public, and no new shares are issued, which means there is no dilution in that company.

Significance for the Company

• Additional Capital: FPOs provide companies with additional funds for growth, debt reduction, or other strategic purposes.
• Enhanced Liquidity: Increasing the number of outstanding shares in the market can improve the liquidity of the stock, making it easier for investors to buy and sell.
• Market Perception: A successful FPO can signal confidence in the company's prospects, potentially boosting investor sentiment.

Significance for Investors

• Investment Opportunities: These FPOs offer investors the chance to purchase additional shares of a company they are already invested in or to enter into a company with a proven track record.
• Dilution Considerations: In dilutive FPOs, existing shareholders' ownership percentages will be reduced, which can affect the stock price and EPS.
• Market Dynamics: FPOs can influence stock prices, and investors should assess the potential impact on their investment portfolios.

FPO vs IPO Key Differences

How to Invest in IPO

1. Research the Company: Understanding its business model, studying its books, and growth prospects will give good insights into the company.
2. Open Demat Account: You need a Demat account which is provided by stockbrokers to trade in IPOs.
3. Apply the IPO: You can apply the IPOs through banks via the ASBA process (or) with the broking firms via UPI and ASBA by blocking the funds.
4. Bidding for Shares: You will either bid a price within the price band for a Book Building IPO or accept the fixed price for a Fixed Price IPO.
5. Wait for Allotment: If you get allotted any shares, the funds will be debited from your applied band account and the shares get credited to your Demat account.

How to Invest in FPO

1. Stay Informed: Keep an eye on public announcements about upcoming FPOs from SEBI.
2. Review the Prospectus: Check the company’s FPO prospectus to understand why they’re raising capital and whether it's a dilutive or non-dilutive offering.
3. Apply for the Offering: You can apply via the same brokerage or Net banking channels, like an IPO.
4. Monitor Share Price: Since FPO shares have already been traded on the market, you may have the opportunity to buy them at the market price or at a specific offering price.

Conclusion

Both IPOs and FPOs are essential methods for companies to raise funds from public investors and provide investors with opportunities to invest in their business. The key difference lies in timing and purpose. IPOs are for companies going public for the first time, while FPOs are for companies that are already public and seek to raise additional funds. Both methods provide access to capital for growth, though IPOs often mark the beginning of a company's public journey.

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