IPO or FPO? Understand the whole game before investing – where is the maximum profit? – market

How do Follow-on Public Offers (FPOs) work?

Public companies can complete FPO by offering additional shares in the open market. They can also avail the benefits of FPO through offer document. FPOs allow companies to raise additional capital by issuing and selling new shares through the stock exchange. The income earned from this goes to the company issuing the stock. Like an IPO, companies that want to make a follow-on public offering must file Securities and Exchange Commission (SEC) documents.

Companies raise additional capital through FPO. This capital is used to repay debt, start new projects, increase research and development, launch new products or expand into new markets. The funds raised from FPO go directly to the company, especially when it issues new shares.

Why do companies bring FPO?

Companies use the money raised through FPO for many things –

Difference between IPO and FPO

IPO and FPO are two very important terms for those investing in the stock market. When a company issues its shares to the general public for the first time and gets listed on the stock exchange, it is called IPO i.e. Initial Public Offering. But when the same company issues new shares to raise capital again after listing, then it is called FPO i.e. Follow-on Public Offer. In simple words, IPO is the first offer to sell shares by a company and FPO is the second or subsequent offer.

How many types of FPO are there?

There are two main types of FPO – dilutive and non-dilutive. Dilutive involves adding new shares, and non-dilutive means existing private shares are sold publicly. In a dilutive FPO, the company issues new shares, which increases the total number of shares in the market. This may reduce earnings per share i.e. EPS and reduce the stake of existing shareholders. However, if the money raised is utilized properly then the company’s growth can be better in the long run.

Whereas in non-dilutive FPO, the company does not issue new shares, rather big shareholders like promoters or directors sell their personal shares in the market. In this situation, the total number of shares of the company does not increase and there is no impact on EPS. The proceeds from the sale do not go to the company but to the investors selling the shares.

Apart from this, there is another method which is called At-The-Market i.e. ATM Offering. In this, the company sells shares gradually as per the need at the current market price. This prevents sudden pressure on the market and gives the company an opportunity to raise funds in a flexible manner. However, this method is not always considered good for raising large amounts of money.

Qualified Institutional Placement (QIP) is a faster and more cost-effective way for Indian listed companies to raise capital. With its help one has to bypass a lot of pre-issue regulatory filings. The objective of QIP launched by the Securities and Exchange Board of India (SEBI) is to reduce the dependence of Indian companies on foreign investment.

Difference between QIP and FPO

What is a green-shoe option?

Green shoe is a kind of over-allotment option in FPO. This allows companies to sell up to 15% more shares than planned. It manages high demand, stabilizes the stock price after listing. This prevents extreme fluctuations by helping underwriters (share sellers) cover short positions.

If the stock price drops below the FPO offer price, the underwriters buy back shares from the market to cover their short positions, thereby supporting the price. If the price increases, they choose to buy more shares from the company at the offer price, which allows them to meet higher demand.

If demand is higher than expected, underwriters may sell up to 15% more shares than planned.

The term comes from the Green Shoe Manufacturing Company (now Stride Rite Corporation), which first included this clause in its 1919 IPO.

IPO vs FPO: What matters for investors?

In India, companies list their IPOs and FPOs mainly on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Investing in an IPO is more risky because the company is coming to the market for the first time and its track record is not known. Whereas in FPO, the investor already has information about the company’s past performance, management and financial data, hence the risk is considered to be slightly less.

If you are a long-term investor and have confidence in the business model of the company, then you can explore opportunities in both IPO and FPO. However, before investing, it is important to deeply analyze your risk appetite, investment target (i.e. why you are investing) and the fundamentals of the company. In the stock market, returns and risks go hand in hand, so only a thoughtful decision can strengthen your portfolio.

Disclaimer: This article is for informational purposes only and should not be construed as investment advice in any way. ET NOW Swadesh recommends its readers and viewers to consult their financial advisors before taking any money-related decisions.