An Initial public offering is the issuance of shares for the first time by a private company that is not listed on the stock exchanges. Post the issuance of such shares, the company gets listed on the bourses, and its shares are then traded publicly. Such a company issues equity to investors in exchange for capital. With this, its ownership also gets diluted. On the other hand, a follow-on public offer, as the name suggests, is a subsequent or second-time issuance of shares after the initial IPO.
Only those companies, which have been listed on the exchanges before, can go for an FPO. There are two types of FPOs known: dilutive and non-dilutive. A dilutive FPO is where new shares are offered to public investors, which increases the company’s outstanding shares. This dilutes its existing shareholding pattern.
On the other hand, a non-dilutive FPO entails the issuance of shares that are already in existence. This means that directors or founders sell their privately held shares in the market. This way, there is no increase in the number of shares for the company. Dilutive FPO is generally undertaken to raise additional capital to fund growth or expand the equity base. In some cases, it has been taken up to meet SEBI’s rule that mandates a listed company to have a minimum of 25% public float. Besides, among other differences between an IPO and an FPO, a company going for an IPO sets a price band for investors to bid, and the issue price is then fixed after gauging investor demand.
In comparison, the issue price for an FPO is mostly fixed lower than the prevailing stock price. This is done to drive higher participation. That said, an IPO is believed to be more profitable than an FPO as investors participate in the expansion phase of the company. Earnings per share decreased due to the issuance of new shares in a dilutive FPO. An IPO, hence, also comes with higher risk as investors can only use the information provided by the company to gauge its growth prospects