Businesses need capital to grow and generate profits. But that’s not a one-time requirement. In most cases, depending on the nature of the business and the stage of growth, companies raise capital from time to time. At times, companies also want to increase public participation and dilute the stakes of existing shareholders.
There are pros and cons of choosing any of these options. If companies decide to raise money through debt, debt-servicing and sustainability become important considerations. On the other hand, raising more equity capital means diluting ownership in the company. Thus, making the right choice between debt and equity is crucial for any company aspiring to raise capital.
When companies decide to tap the public markets for the first time, they launch their IPOs (Initial Public Offers). In the IPO phase, companies expand their shareholder base and raise capital from the public thereby shedding their privately-owned nature.
That said, sometimes IPOs can be completely non-dilutive i.e. there is no creation of fresh shares, only the existing shareholders offload their stake partially or fully. Such types of IPOs are called Offer For Sale (OFS). An OFS doesn’t lead to any capital inflow to the company. Money raised through the issue goes entirely to the existing shareholder.
The difference between IPO and FPO is quite straightforward and self-explanatory. If an IPO is the first instance of raising funds through public markets; the subsequent rounds are known as FPOs.
Public limited companies enjoy greater recognition and their shareholders get more liquidity thanks to the exchange-traded nature of stocks. But these benefits come with a lot of public scrutiny. Listed companies have to follow stricter compliance norms which are aimed at protecting the interest of shareholders.
All these factors work in favour of listed companies and help them launch FPOs if required at a future date.
|Time taken to launch
|The entire process of preparing for the IPO, taking necessary approvals and eventually launching the offer can be quite exhausting. Depending on the nature of the business and the complexity of operations, IPO-bound companies may take time, ranging from several months to a few years.
|It’s comparatively less time-consuming to launch an FPO.
|More risky since there is no prior record of public scrutiny.
|Comparatively less risky depending on the time interval between the IPO and the FPO. Public markets are quick to learn about the management quality and the company financials.
|Price discovery happens at the time of IPO but stretched valuations can increase the risk factor substantially.
|FPO pricing depends primarily on two factors—present market price and the level of equity dilution, if any.
|Impact on existing investors
|Public listing provides more liquidity to the existing shareholders of the unlisted entity.
|Equity dilution can create a supply overhang thereby creating a price resistance near the FPO price, albeit temporarily.
The answer isn’t either/or. Factors such as the objective of the issuance, valuations, market sentiments and business prospects play a vital role in the success or the failure of an issue. Well-priced IPOs launched during strong market conditions receive strong investor response and may offer dual opportunities—listing gains as well as long-term capital appreciation.
FPOs are often issued at a minor discount to the prevailing market price to attract investors and more often than not, immediate gains are capped since there is little scope for price discovery, unlike that at the time of IPO.
IPO vs. FPO isn’t an apples-to-apples comparison. Therefore, instead of generalizing any rule, you should consider any IPO/FPO on its merits and make a well-informed decision.
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We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in the securities of the company. We do not have any directorships or other material relationships with the company.
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