Adani calls off share sale: What is an FPO? How is it different from IPO?

Companies may use an FPO to reduce debt or raise more capital for expansion.

Adani Enterprises has decided not to proceed with its fully subscribed Follow-on Public Offer (FPO), the conglomerate said in a statement late on Wednesday, hours after the shares of the firm nosedived 28.45% to close at ₹2,128.70 on the BSE. Billionaire Gautam Adani's empire has lost more than $100 billion following explosive allegations of accounting fraud last week by US short-seller Hindenburg Research.

Gautam Adani's empire has lost more than $100 billion following explosive allegations of accounting fraud last week by US short-seller Hindenburg Research. (File)

But what is an FPO? It is when a company, which has already been listed on an exchange, issues new shares to investors. Companies may use an FPO to reduce debt or raise more capital for expansion.

There are two types of FPOs: dilutive follow-up public offer and non-dilutive follow-up public offer

In dilutive FPO, the company issues new shares for the public, but the total valuation of the company remains unchanged. The rise in the number of shares affects the earnings per share (EPS) in dilutive FPOs.

Existing stockholders sell off their shares in non-dilutive FPO. EPS is not impacted in this case as the company’s number of shares does not increase in this type of FPO.

What is an IPO?

Initial public offering or IPO is when a company gets listed on a stock exchange and offers its shares to the public for the first time. A person gets part ownership in the company when buying its shares.

As the name suggests, IPO is the first issue while FPO is an additional issue after the initial offer.

FPO vs IPO

Compared to FPO, the risk factors involved while investing in an IPO are far higher. While the financial details and past performance of a company are available after an FPO, an IPO requires more research about the company background.

How to invest?

Adults with a PAN card and demat account can apply for both FPOs and IPOs via Retail Individual Investors (RIIs) allocation. The shares can be bought either through a broker or an Application Supported by Blocked Account (ASBA) facility from one’s bank.

Although IPOs have more potential to return higher profits due to the risk factor, experts say that an investing decision is to be taken after proper analysis of the market, personal financial goals and risk appetite.