Difference Between IPO And FPO: Here’s What Investors Should Know

IPO vs FPO: Anyone serious about understanding the stock market would have come across these two words: IPO and FPO. They seem similar, both involve companies selling shares, and at a glance, one might even think they are interchangeable. But they aren’t. In fact, mixing them up would be like confusing a movie premiere with a sequel.

Companies raise money for survival, growth, and to overcome competition. A factory needs machines, a telecom giant needs spectrum, and a tech start-up needs funds for research and development (R&D); and when private coffers are not enough, the public market becomes the playground. That’s where IPOs and FPOs come into play.

What is an IPO

An initial public offering (IPO) is exactly what the name says: a company offers its shares to the public for the very first time. This is the grand entry, the curtain-raiser. Once the shares are sold and listed, they begin trading on the stock exchanges, such as the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), or both.

The company making this offer is called the issuer. But the IPO process is complex, costly, and heavily scrutinised. Investment banks, underwriters, promoters, regulators, everyone is involved. Without external expertise, a company cannot navigate this maze.

Types of IPO

There are two main types of IPOs.

Fixed Price Issue: Here, the company sets a fixed share price in advance. The investor knows what they are paying before they apply. This price is carefully calculated with merchant bankers, but if the price is set too high, the issue can flop.

Book-Building Issue: Unlike fixed pricing, here the company gives a price band, say Rs 100–Rs 120, and the actual price is discovered based on investor demand. If demand surges, the final price ends up at the higher end of the band. If demand is weak, it settles lower.

Why Do Companies Opt for an IPO

There’s no single reason. Companies go public for multiple motives:

Capital Infusion for Growth: Companies need capital to set up new factories, for expansion or product launches, among others.

Credibility of The Brand: Customers and partners take a company listed on the stock exchange more seriously. Legitimacy is conveyed by being listed on the NSE, BSE or international exchanges, such as NASDAQ or the NYSE.

Liquidity for Early Investors: Venture capitalists and private equity sponsors finally receive an exit opportunity.

Debt Reduction: Most companies use IPO proceeds to repay loans, enhancing financial health.

A Large Investor Base: Institutional investors, retail investors, mutual funds, and even foreign investors can invest in a listed stock.

The IPO Process

Here are the steps to issue an IPO.

Evaluation and Preparation: The company appoints investment banks, undertakes financial audits, and then files a Draft Red Herring Prospectus (DRHP).

Regulatory Approval: In India, the Securities and Exchange Board of India scrutinises every detail before giving clearance.

Pricing & Roadshows: Fixed price or book-building gets decided. Executives then pitch the story to investors in roadshows.

Public Subscription: The IPO opens for a few days and investors place bids. If demand exceeds supply (oversubscription), allotment becomes tricky. If demand lags, the issue may flop.

Listing Day: Once allotment is done, the shares hit the exchange. Listing day is unpredictable, as prices can skyrocket if hype is strong, or crash if sentiment is weak.

Risks with IPOs

Here are some risks that are usually associated with IPOs:

• No trading history to fall back on.

• Valuation may be inflated.

• Market timing can make or break returns.

• Volatility in early days can be brutal.

In short, IPOs are not for people with lower risk appetite. It is more suited for those with appetite for risk and patience for long-term gains.

What is an FPO

A follow-on public offering (FPO) is when an already-listed company issues fresh shares. It’s not the debut, its the continuation. Vodafone Idea is a good example. Already listed, it floated an FPO of Rs 18,000 crore in 2024 to raise capital.

So, whereas in an IPO the company makes its first foray onto the exchange, an FPO is a follow-up. The company is already listed, investors have seen its history, and the intent is typically focused: expansion, repayment of debt, or restructuring.

Types of FPO

There are two groups of FPOs:

Dilutive FPO: In this, new equities are issued, diluting current shareholders’ stakes. Raised capital makes the company stronger, but shareholders’ portion of the pie shrinks.

Non-dilutive FPO: There are no fresh issues of shares. Current shareholders, typically promoters, dispose of their shares and the proceeds go to them, not the company.

Why Do Companies Choose an FPO

The motives can be different, but they typically comprise:

• Raising capital for growth or acquisitions.

• Increasing liquidity by increasing the amount of tradable shares.

• Reducing debt burden and restructuring equity.

• Strengthening market credibility with proof of investor trust.

The FPO Process

The process follows a structured path:

Company Decision: The company first figures out the fund requirements and accordingly decides whether they should go for a dilutive or non-dilutive FPO.

Regulatory Filings: The company then submits the prospectus to Sebi with all financials, risks, and objectives.

Pricing: The pricing is decided – whether the company should go for a fixed price or book-building, just like IPOs.

Public Subscription: Investors bid for shares during the issue window. Oversubscription leads to proportional allotment.

Listing. This involves listing new shares (in case of dilutive) or sold shares (non-dilutive); then trading resumes.

Risks with FPOs

It is crucial for investors to know that FPOs are not risk-free either. FPOs come with their own issues:

Dilution of earnings: More stocks usually mean lower earnings per share.

Market-driven volatility: Equity prices can be volatile on the basis of overall sentiment.

Company-specific risks: Weak financials or poor demand can sink the FPO.

That said, FPOs are generally safer than IPOs because the company’s history is visible to investors.

IPO vs FPO: Which is Better for Investors

An IPO can be a gamble. You are betting on potential, sometimes with little more than hype and a prospectus. The risk is high, but so are the possible returns.

An FPO, on the other hand, offers clarity. You can analyse the company’s performance, you know how its stock behaves, and you can make a decision based on facts rather than speculation. It’s safer, but also less likely to deliver extraordinary windfalls.

• How to Invest in an IPO

• Open a Demat and Trading account.

• Check NSE/BSE websites for DRHPs, read carefully.

• Apply through ASBA (banking route) or UPI via trading platforms.

• Bid during the open window (3–5 days).

• Approve fund blocking.

• Wait for allotment (lottery system).

• On listing day, shares reflect in your demat. Decide to hold or sell.

How to Invest in an FPO

• Read the company’s RHP filed with Sebi.

• Ensure you have a valid demat account.

• Apply via ASBA or offline forms through authorized intermediaries.

• Enter bid details within the price band.

• Wait for allotment. If granted, the shares will land in your demat account.

• Track listing day performance.