FPOs and IPOs

Initial public offer (IPO) and follow-on public offer (FPO) are two basic fundamental ways a company raíses money from the equity market. Companies can also raise money by way of corporate bond issuance.

Follow-on Public Offerings (FPOs):

FPOs are secondary market offerings made by already publicly traded companies to raise additional capital. These offerings enable companies to access funds for various purposes, such as expansion, debt repayment, or acquisitions, without the need for listing on a stock exchange. FPOs involve the sale of new shares to the public, often at a discount to the prevailing market price, through a process known as a rights issue or a public offering.

Key Features of FPOs:

1. Purpose: FPOs are typically conducted to raise capital for growth initiatives or to address financial needs.
2. Timing: Companies opt for FPOs when they require additional capital after their initial public offering (IPO) and when market conditions are favorable.
3. Regulatory Requirements: FPOs are subject to regulatory approval and compliance with securities laws and stock exchange regulations.
4. Existing Shareholders: Existing shareholders may have the option to participate in the FPO to maintain their ownership stake or to sell their shares.

Initial Public Offerings (IPOs):

IPOs mark the first sale of shares by a privately owned company to the public, enabling it to become a publicly traded entity. Companies opt for IPOs to raise capital, enhance visibility and credibility, provide liquidity to existing shareholders, and facilitate future fundraising efforts. IPOs involve various processes, including due diligence, valuation, underwriting, and marketing, conducted in collaboration with investment banks and other financial institutions.

Key Features of IPOs:

1. Transition to Public Company: IPOs enable privately owned companies to transition to public ownership, allowing them to access a broader investor base and raise significant capital.
2. Valuation: Companies undergo rigorous valuation assessments to determine the offering price and market demand for their shares.
3. Investor Participation: IPOs offer investors the opportunity to purchase shares of a company before they begin trading on a stock exchange, potentially allowing for significant capital appreciation.
4. Regulatory Scrutiny: IPOs are subject to stringent regulatory oversight by securities commissions and stock exchanges to ensure compliance with disclosure requirements and investor protection regulations.

It depends on your risk level and goals. Your risk levels need to be extremely high to invest in an IPO because you do not have much idea about the company.

An FPO is relatively a safer bet for individual investors and new investors. Investing in an IPO requires more research than FPO. You need to understand the company fundamentals.

If you are a long term investor, with a good risk appetite and have faith in the company, you can consider investing in an IPO. When it comes to the differences between FPO and IPO, risk and returns are very important components. However, risk and returns are correlated.

IPOs have more potential to return more money if the company kicks off to a good start but there are more ‘ifs’ to it. To understand your profile as an investor and then take the decision.

G Akshay GAA Consulting