The world of stock markets is enthralling, providing many avenues for businesses to raise money and for investors to grow wealth. The two most popular kinds of capital mobilizing operations, under which companies offer shares to the public at large, are Initial Public Offer and Further Public Offer. It may be noted that these terms are often mentioned together, but they differ considerably. This blog will offer insightful information about what initial public offer and further public offer entail, bringing you the major differences between them.
What Is an Initial Public Offer (IPO)?
An Initial Public Offer (IPO) is the first public sales of shares of a listed private company in primary market. At this stage, the private company will become a public company because it has shares with the general public.
Key Features of an IPO:
- Purpose: Raising finance for expansion, repayment of debts, or any other business need.
- Participants: Attracts mainly institutional, retail, and qualified institutional buyers (QIBs).
- Process: File a prospectus before the regulatory authority (like SEBI – Securities and Exchange Board of India), which describes the business operations, financials, and risks involved.
- Result: The post-IPO company is then listed on stock exchanges and is free to trade its shares.
Example:
A famous example of an IPO is the public offer launched by Reliance Industries in 1977. That was the world’s venture capitalist money raising event that finally led to massive growth.
What Is a Further Public Offer (FPO)?
A Further Public Offer (FPO), also known as a follow-on offering, is an issue of more shares by a company already listed on a stock exchange to generate additional resources. The difference between an IPO and an FPO is that the former refers to the first exposure of a company to public investors, while the latter is the secondary offering.
Key Features of an FPO:
- Purpose: Raising finances for some projects, to pay debts, or meet operating expenses.
- Participants: Target for both existing shareholders and new investors.
- Types:
- Dilutive FPO: since by increasing the number of shares outstanding, existing shareholders’ ownership percentage gets reduced.
- Non-Dilutive FPO: it involves existing shareholders’ shares, but does not change the total number of shares of the company.
Example:
A huge example of an FPO would be the follow-on offering of State Bank of India (SBI) in 2014, which aimed at improving its amount of capital that it holds.
Key Differences Between an Initial Public Offer and Further Public Offer
It is crucial for understanding the difference between an initial public offer and a further public offer for one and all-the company and investors alike. Here’s a large comparison between both of them:
| Aspect | Initial Public Offer (IPO) | Further Public Offer (FPO) |
| Definition | The first sale of shares to the public. | Additional issuance of shares by a listed company. |
| Purpose | To raise funds for business growth or debt repayment. | To generate additional capital for expansion or other needs. |
| Participants | Institutional and retail investors. | Existing and new investors. |
| Shareholder Impact | Creates new shareholders. | May dilute existing shareholders’ stakes in dilutive FPOs. |
| Regulatory Process | Requires extensive disclosures and approvals. | Relatively simpler as the company is already listed. |
The Biggest Initial Public Offer and Further Public offer in Indian Stock Market History
India has been a witness to many of the historical IPOs and FPOs during the period, and it had its’ largest IPOs in history, which is about LIC or Life Insurance Corporation of India in India, in the sequence standing highest in the receive value collection of over ₹21,000 crores. The largest FPO of Coal India Limited (CIL) was in the year 2015, which gathered a total collection of approximately ₹22,600 crores. Such record-breaking public offerings are indicative of the fact that IPOs and FPOs can generate huge tide of funds besides opening up viable opportunities for investors.
Benefits of Initial Public Offer and Further Public Offer for Companies
Considerations for Investors
Investors must take care to look at the pros and cons while deciding on an initial public offering and further public offering. IPOs and FPOs can give rewards, but that requires thorough research and planning before making a decision. The following are the detailed aspects of this approach to such public offerings.
Why Invest in an IPO?
- Opportunity to Invest Early:
Investing through an IPO gives an opportunity to purchase a company’s shares at its initial offering price which could be very much below the market price after listing. Very often this strategy yields high returns on successful companies. - Potential for High Returns:
Nifty new business models or high-growth sectors offer considerable wealth to thesaurus-IPO investors. A classic example is the MRI in which the IPO value at ₹95 per share in 1993 multiplied to a great extent over the years. - Portfolio Diversification:
IPOs actually expand the portfolios of an investor by the share of yet another with new companies perhaps not there already. - Possibility of Listing Gains:
One of the most catching features about IPO’s is the ability of making listing gains. If the demand for shares is more than the supply, then the shares could be offered at a listing price much higher than the issue price, thus enabling the making of gains instantly.
Risks to Consider with IPOs:
- Uncertainty of Performance:
Because it is the firm’s first time going public, its performance and growth in the future could be vague over the coming years. - Market Sentiment Dependence:
A company’s IPO or initial public offering performance may rely upon market sentiments at a particular period and the people who are investing at the time when the company has potential that might be heading under. - Lack of Historical Data:
Unlike FPOs, IPOs have companies having no prior activity in the stock exchange. It makes it very difficult to measure as to how stable such firms are with their futurity.
Why Invest in an FPO?
- Clarity on Company Performance:
An FPO gives the investor access to historical performance data, financial records, and past market behaviour in order to make more informed decisions. - Reduced Risk Compared to IPOs:
The fact that it is already listed means the company has proven track, which reduces uncertainty that IPOs normally entail. Investors can evaluate its market reputation, financial health, and operational stability. - Opportunity to Buy at a Discount:
Companies usually price FPO shares at a slight discount of the current market price of that share. This actually is an excellent entry for the new investors and an easy way for the existing to add more shares at a lower cost. - Support for Long-Term Investors:
An FPO allows present shareholders to realize further increases in the value of a firm, due to potential dilution with ownership in place. For new investors, FPO’s gives a chance to invest in outstanding company shares with an entry bar much lower than that from a secondary market.
Risks to Consider with FPOs:
- Dilution of Shareholding:
A dilutive FPO is that in which the new issuance of shares increases the number of shares outstanding, hence ownership percentage and EPS of the existing shareholders can be diluted. - Market Volatility:
Since FPOs comprise companies already listed in the market, performance in the market can be relatively very volatile because of various factors, like the economy, regulatory changes, and even the industry-specific trends. - Perception of Financial Weakness:
A frequent utilization of FPOs may highlight financial pressure or the inability of the organization to generate satisfactory internal funds and, therefore, is the biggest concern to risk-averse investors.
Factors to Evaluate Before Investing
If you are opting for an IPO or again FPO, here are a few things you should keep in mind about the company before that investment:
- Company Fundamentals:
- The financial soundness of the company, including revenue growth, profit margin, and debt level, should be analysed.
- Check out the prospectus for IPOs and read through FPOs’ financial suggestions, analyzing the business model of the company and future plans.
- Valuation:
Examine the increased valuation of the company concerning its closest peers in the industry- be it good relative to the issue of share price. Get away from expensive offerings which are not likely to bring in any high returns. - Industry Outlook:
Research the growth prospects in the industry where the company operates. For example, fast-growing industries like technology, renewable energy, or e-commerce would offer better value returns. - Investment Horizon:
Short term investment opportunity: for example listing gains from IPOs; creating wealth for the long run. - Risk Tolerance:
Measure what is your permissible risk and set your financial goals. Most speculative are IPO’s; whereas conservative Type FPO’s may serve well to focus on security.
Conclusion
To conclude, initial public offers and further public offers from both contexts, capital-raising mechanisms for companies and an avenue for investments diversification for investors will be. To the companies, IPOs open up public markets, while FPOs lend funding to already listed companies.
Beyond simply knowing the parameters that differentiate IPOs from FPOs, one improves by taking the two and making the most of them such that capital profits are maximized. Such research is meant to be carried out with due diligence before jumping into public offerings.
Ready to explore investment opportunities? Alright here is learning about IPOs and FPOs in line with your financial targets!
