What is Difference Between IPO and OFS? IPO vs OFS

In the world of stock markets, there are two frequently discussed terms – Initial Public Offering (IPO) and Offer for Sale (OFS). These are distinct avenues companies use to generate capital by inviting the public to invest in their shares. Although IPOs and OFSs might appear similar on the surface, they diverge in their objectives, procedures, and regulatory obligations.

What is IPO?

An Initial Public Offering, or IPO, is a method by which a private company transforms into a publicly-traded entity by offering shares to the general public in exchange for capital. This process leads to the company becoming listed on the stock exchange, allowing investors to purchase shares through the market and become shareholders in the company.

Typically, IPOs are more commonly utilized by smaller companies rather than well-established ones, as these smaller firms are usually in their early stages of growth and require additional investment from the public. During an IPO, the general window for buying shares typically spans 3 to 10 days. In this process, 35% of the shares are reserved for retail investors who cannot invest more than Rs. 2 lakhs in purchasing these shares.

The entire IPO process involves various promotional activities to raise awareness about the company’s offering. Additionally, appointing an underwriter and complying with the regulatory requirements of the Securities and Exchange Board of India (SEBI) contribute to the overall expenses.

There are two main types of IPOs:

1. Fixed Price Issue: In this type of IPO, the company determines a fixed price for its shares before going public. This fixed price is mentioned in the offer document, and investors are required to pay this predetermined price when subscribing to the company’s IPO.
2. Book-Building Issue: Unlike the fixed price issue, companies opting for a book-building issue do not set a fixed price for their shares. Instead, they establish price bands. The final share price is determined after evaluating and recording investor demand during the book-building process.

What is OFS?

Offer for Sale (OFS) is distinct from an IPO as its primary aim is not to raise fresh capital. Instead, OFS enables existing shareholders to reduce their ownership in the company through the primary market. It results in a change of ownership from one shareholder to another without increasing the company’s share capital. Some companies combine their IPOs with OFS to provide an exit opportunity for private equity investors and promoters.

OFS is typically open to the top 200 companies based on market capitalization. Non-promoter shareholders holding more than 10% of shares are also eligible to sell their stakes. As per the Securities and Exchange Board of India (SEBI) guidelines, 25% of the shares offered in OFS should be reserved for mutual funds and insurance companies, while 10% should be available for retail investors.

Before initiating an OFS, the company must notify the stock exchanges at least two days prior to making the announcement. Generally, this method is employed by companies that are already listed on the stock exchange and have existing shares in circulation.

Difference Between IPO and OFS

Aspect	IPO (Initial Public Offering)	OFS (Offer for Sale)
Purpose	Raise fresh capital for the company	Allow existing shareholders to sell their shares
Source of Shares	New shares issued by the company	Shares sold by existing shareholders
Capital Infusion	Increases the company’s capital	No capital infusion into the company
Shareholder Composition	Includes both existing and new shareholders	Existing shareholders only
Company Ownership	Company’s ownership structure may change	Company’s ownership structure remains the same
Listing Process	Company transitions from private to public	No change in the company’s listing status
Promoters’ Stake	Promoters may retain or dilute their stake	Existing shareholders dilute their stake
Regulatory Requirements	Stringent regulatory and disclosure requirements	Compliance with SEBI guidelines
Use of Proceeds	Used for business expansion, debt reduction, etc.	Goes to selling shareholders
Type of Companies	Both new and established companies can use IPO	Typically used by already listed companies
Eligibility of Sellers	Only the company and its promoters can sell shares	Existing shareholders holding more than 10% can sell
Participation by Retail Investors	Open to retail investors with certain limits	Reserved portion for retail investors
Mutual Funds and Insurance Companies	May participate but no specific allocation	Specific allocation for mutual funds and insurance companies

Investing in Offer for Sale (OFS) can offer several benefits to investors:

1. Liquidity: OFS provides an opportunity to buy or sell shares of established companies in the secondary market, enhancing liquidity. Investors can easily enter or exit positions without having to wait for the company to go through an IPO process.
2. Lower Volatility: OFS transactions typically involve well-established companies with established track records, which can result in lower stock price volatility compared to newer IPOs.
3. Cost-Effective: OFS is a cost-effective method of acquiring shares, with minimal additional charges beyond basic transactional fees and taxes. This can lead to cost savings for investors.
4. Paperless Process: The application system for OFS is primarily conducted online, reducing the need for extensive paperwork and administrative hassles. It offers a convenient and streamlined process for investors.
5. Efficiency: OFS is generally less time-consuming for the issuing company or entity because of its one-day operational feature. This efficiency can be advantageous for both issuers and investors.

IPOs and OFSs offer distinct advantages to investors, and the choice between them depends on various factors:

IPO (Initial Public Offering):

• First Mover Advantage: Investors in IPOs have the opportunity to be among the first to buy shares in a newly listed company, potentially benefiting from early price appreciation.
• Liquidity and Listing Gains: IPO shares are often sought after, leading to liquidity and the possibility of listing gains if the stock price rises post-listing.
• Participation in Company’s Growth: IPO investors become shareholders and have voting rights, allowing them to participate in the company’s decision-making.

OFS (Offer for Sale):

• Access to Historic Data: OFS investors can access historical financial data and performance records of the company, providing valuable insights into its track record.
• Reduced Volatility: Established companies often utilize OFS, which can result in lower stock price volatility compared to IPOs.
• Cost-Effective: OFS transactions are generally cost-effective with fewer charges and paperwork.

Summary

An Initial Public Offering (IPO) is a method by which a private company goes public and offers its shares to the general public through stock exchanges to raise fresh capital. On the other hand, an Offer for Sale (OFS) is a process used by a promoter or existing shareholders to reduce their ownership stakes in a company.

From an investor’s perspective, both IPOs and OFSs present attractive investment opportunities. IPOs offer the advantage of being among the first investors with potential listing gains, while OFSs often provide shares at a considerable discount.

However, it’s essential for investors to exercise caution and conduct thorough research before making a decision. Understanding the company, its financial health, market conditions, and the specific terms of the offering are crucial steps in making an informed investment choice.