Difference Between IPO And FPO

Every business relies on money at all levels - from the inception of a company to its day-to-day operations to its liquidity. For every business entity, optimal procurement of its finances is therefore a critical function.In this we will get to know about the Difference Between IPO And FPO.

As a general rule, companies acquire money from two sources: Debt and Equity. When you raise funds through loans, debentures, or other financial institutions, you will have to pay interest.Chief Financial Officers are responsible for procuring sufficient funds for a company as well as ensuring that these funds are acquired efficiently.

Therefore, to keep financing costs in check and at the same time procure funds for the business, a company issues shares of the company in lieu of money, which is known as Equity Financing. As too much debt hampers a company's profitability, companies do this method in order to improve leverage.

Simply, there are 2 methods for raising money by equity financing:

1. By issuing IPOs (Initial Public Offer)

2. By issuing FPOs (Follow on Public Offer)

What is an IPO?

In IPOs, a company divides a significant portion of its total value into small denominations of equal shares and lists those shares on the primary market for the public to subscribe to those shares whenever it wants to raise money from the public for the first time.

Since the IPO is not yet listed, it is issued in the primary market since the company is issuing its shares for the first time. Once the shares of the company are listed in the primary market and the IPO is subscribed, they can then be traded in the secondary market.

Types of IPO

1. Fixed Price Issue:

There is a fixed price for this kind of public issue, and many people apply for a lot of shares.

1. Book Building Issue

An investment bank keeps a price band of for example 60-100 rupees for this type of public issue. Per share With this, the bank assesses the market response to the price band.

Objectives-

The primary reason why companies go for IPO is that Equity Financing could be a feasible option to do so. Although this company raised some private equity from angel investors or venture capitalists, it was not listed.

As the company has grown in size and its requirements have increased, private equity investors cannot invest that much money in it.

The company now goes public as there are more investors, and institutional investors such as mutual funds, and pension funds can also be tapped as investors since they have access to huge amounts of money. In order to take advantage of scalability IPO is brought by companies.

It is also possible for smaller companies with smaller capital requirements to issue an IPO as long as they meet all the legal requirements.The ultimate objective of IPO is to fulfill the financial needs of business entities.

What is FPO?

Follow-on Public Offering (FPO) is a process by which a company, which is already listed on an exchange, issues new shares to the public or to its existing shareholders. Companies might issue FPO in share market to raise fresh funds for a new project or to expand their business.

In essence, a Follow-on Public Offering is all the subsequent issues issued by companies to raise money after their initial public offering (IPO). For example, Ruchi Soya came up with its FPO on March 24, 2022.

Types of FPO

There are 2 types of FPO-

1. Dilutive FPO-

It occurs when a company wants to raise more funds from the public without diluting the existing shareholding of current shareholders or promoters.

With more shares added and the valuation of the company remaining the same, it results in a decrease in earnings per share of the company. This is why Diluted FPO is called diluted EPS.

1. Non-Dilutive FPO-

This type of FPO involves the promoters or big shareholders of the company letting go of their shares. There are no new shares issued here, but existing shares are transferred from one shareholder to another. Hence, the earnings per share of the company remain the same.

Note-

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