Types of IPO
There are two main types of IPOs.
Fixed Price Issue: Here, the company sets a repaired 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 repaired pricing, here the company gives a price band, state Rs 100–Rs 120, and the actual price is discovered based on investor demand. If demand surges, the final price finishs up at the higher finish 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 required 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 exmodify more seriously. Legitimacy is conveyed by being listed on the NSE, BSE or international exmodifys, 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 apply 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 Exmodify Board of India scrutinises every detail before giving clearance.
Pricing & Roadreveals: Fixed price or book-building obtains decided. Executives then pitch the story to investors in roadreveals.
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 exmodify. 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 build 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 builds its first foray onto the exmodify, an FPO is a follow-up. The company is already listed, investors have seen its history, and the intent is typically focapplyd: 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 builds 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 repaired 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 stated, FPOs are generally safer than IPOs becaapply 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 build a decision based on facts rather than speculation. It’s safer, but also less likely to deliver extraordinary windfalls.
Leave a Reply