When companies seek to raise capital, they have two main ways of doing so in the stock market—through an IPO (Initial Public Offering) or an FPO (Follow-on Public Offering). Both methods involve offering shares to the public, but there are key differences in how they work and why they are used.
What Is an IPO?
An Initial Public Offering (IPO) is the process by which a company sells its shares to the public for the first time. In an IPO, a company that was previously privately owned becomes publicly traded, allowing it to raise capital from the general public.
Why Do Companies Launch IPOs?
- To raise significant amounts of capital for expansion, new projects, or debt repayment.
- To allow early investors, founders, and employees to sell some of their shares and potentially profit.
- To boost the company’s visibility and reputation by listing on a stock exchange.
When a company undergoes an IPO, it works with investment banks to underwrite the offering and set a price for the shares. Once public, the company’s stock value is determined by market forces—supply and demand—and it must adhere to stricter regulatory requirements, including regular financial disclosures.
What Is an FPO?
A Follow-on Public Offering (FPO), also known as a secondary offering, occurs when a company that is already publicly traded offers additional shares to the public. FPOs happen after the IPO, allowing the company to raise more capital.
Why Do Companies Launch FPOs?
- To raise extra capital for acquisitions, business expansion, or debt repayment.
- To allow existing shareholders, such as early investors or employees, to sell some of their holdings.
Just like an IPO, an FPO is usually underwritten by investment banks that help determine the share price. The company remains listed on the stock exchange, and its shares continue to trade publicly.
Key Differences Between IPO and FPO
While both Initial Public Offerings (IPO) and Follow-on Public Offerings (FPO) allow companies to raise funds by issuing shares to the public, they differ in several important ways:
- First vs. Subsequent Offering:
An IPO is the first time a company offers its shares to the public, signaling its transition from private to public ownership. In contrast, an FPO occurs after the company has already gone public and wants to issue additional shares to raise more funds. - Objective:
IPOs are primarily used to raise capital for the company’s initial expansion, projects, or debt repayment. FPOs, on the other hand, are often used to finance further growth, acquisitions, or let existing shareholders cash out by selling their shares. - Market Impact:
IPOs often create more excitement and buzz in the market, as they represent a company’s debut in the stock market. FPOs, however, tend to generate less hype since the company is already publicly traded. - Pricing Strategy:
In an IPO, the share price is often set based on predictions of demand and market conditions. With an FPO, the price is usually more straightforward, as it aligns with the company’s existing stock price on the market, giving investors a clear benchmark. - Regulatory Scrutiny:
IPOs undergo significant regulatory review and disclosure requirements, as it is the company’s first time entering the public market. FPOs, while still regulated, face less scrutiny since the company is already compliant with public market regulations. - Ownership Dilution:
In an FPO, the issuance of new shares can dilute the ownership stakes of existing shareholders. IPOs don’t face this issue since no prior public shareholders exist.
IPO vs FPO Explained in Simple Terms
Let’s break down IPO and FPO in a way that’s easy.
IPO (Initial Public Offering)
Think of an IPO like opening a new momo shop in your neighborhood for the very first time. You’ve been making great momos for your family and friends, and now you want to expand. However, to open the shop, you need money for the shop rent, ingredients, and equipment.
To raise this money, you invite people from your community to invest in your shop. In exchange, they get a share of ownership in your business. Once you raise the money, the shop opens, and everyone who invested can start benefiting from its success. This is similar to a company offering shares to the public for the first time through an IPO. It’s the company’s way of inviting people to invest and share in its future profits.
FPO (Follow-on Public Offering)
Now, let’s say your momo shop is doing well, but you want to open a second branch or buy better kitchen equipment to make even more momos. This time, you go back to your original investors and tell them you need more money to expand the business. You also let new investors join in, offering them ownership in exchange for the extra capital.
This is what happens in an FPO. The company has already gone public, but it’s offering more shares to raise additional funds for expansion, improvements, or paying off debts.
The Difference
- IPO is like starting a new business from scratch and asking people to invest in your vision for the first time.
- FPO is like going back to your original investors after your business has grown and asking for more money to expand it even further.
Example of FPO in Nepal
One recent example of an FPO in Nepal is from Samata Gharelu Laghubitta Bittiya Sanstha Limited (SMATA). The company issued 3,50,904.25 shares at a face value of Rs 100 per share, aiming to raise Rs 3.50 Crores. The FPO was open to the public from 12th Kartik 2081, with an early closing on 20th Kartik, and a potential extension to 26th Kartik if the issue wasn’t fully subscribed. Muktinath Capital Limited acted as the issue manager.
This shows that even after going public, companies often require additional funding, which can be achieved through FPOs. It also allows retail investors to take part in the growth of established companies.
In Conclusion
Both IPOs and FPOs are vital tools for companies looking to raise capital, but they serve different purposes. An IPO helps companies tap into public markets for the first time, while an FPO allows them to gather additional funding after they are already publicly listed. For investors, IPOs can be a chance to invest early in a growing company, while FPOs provide an opportunity to invest in already-established businesses.
Understanding the difference between the two can help you make more informed investment decisions. Whether it’s an exciting new IPO or a strategic FPO, both can offer opportunities for growth in your investment portfolio.
