What is Difference Between IPO and OFS?
- 01 Mar 2024
- By: BlinkX Research Team
Investing in stock markets provides several options to increase your cash and accumulate wealth. Initial Public Offerings (IPOs) and Offers for Sale (OFS) are two popular ways to invest in the equity markets. Both allow investors to acquire shares in corporations, but they differ greatly. In this post, we will learn about the difference between IPO and OFS and how they function and benefit investors.
These are important principles businesses employ to raise capital from the equity market. In this piece, let's look at what they are and how they differ Between IPO and OFS.
What is Initial Public Offering (IPO)?
The abbreviation for Initial Public Offering (IPO) refers to the process by which a private firm becomes a publicly listed one by selling shares to the general public in return for funding. The corporation is listed on the stock exchange market as a result of its commercialism. This implies that investors can purchase stock in the company and become shareholders through the stock exchange market.
Smaller companies are more likely to use an initial public offering than larger ones, as the latter are still in the early stages of growth and require more attention from investors. The usual timeframe for purchasing shares in an IPO is 3-10 days. In this case, 35% of the stakes are reserved for retail investors who cannot afford to pay more than Rs. 2 lakhs on the shares.
The entire process must go through various promotional material actions to get the word out. Furthermore, choosing an underwriter and completing the Securities and Exchange Board of India (SEBI) regulations add to the costs.
Table of Content
- What is Initial Public Offering (IPO)?
- What is the Offer for Sale (OFS)?
- Difference Between IPO and OFS
- How Does IPO Work?
- How does OFS Work?
What is the Offer for Sale (OFS)?
The Offer For Sale (OFS), unlike an IPO, is not intended to raise new money. Existing shareholders can dilute their interests in the primary market using this strategy. An OFS results in a transfer of ownership from one shareholder to another and does not raise the firm's share capital. Some firms even combine their IPOs with OFS to provide non-public equity investors and promoters with a partial exit.
OFS is reserved for the top 200 corporations in terms of market capitalisation. Non-promoter shareholders who own more than 10% of the stock may also sell their shares. According to the Securities and Exchange Board of India (SEBI) norms, mutual funds and insurance firms should own 25% of OFS, while merchants should own 10%.
The corporation must notify the stock exchanges two days before the announcement of the OFS notice. Firms previously listed on the stock exchange typically adopt this strategy.
Difference Between IPO and OFS
To help you learn the difference between an IPO and an OFS, consider the following factors:
| Factor | IPO | OFS (Offer for Sale) |
|---|---|---|
| Objective | Raise capital for expansion via investor ownership. | Offer shareholders (>10%) to sell shares, funds go to them, not the firm. |
| Rules & Regulations | Underwriting, SEBI registration, prospectus drafting. | Exchange notification 2 days before execution. |
| Share Reserves | 35% for retail investors. | 25% (mutual funds, insurance), 10% for retail investors. |
| Time Taken | 3-10 days completion. | One trading day execution. |
| Cost | High expenses (advertising, underwriter, SEBI). | Minimal expenditure and regular transaction charges are beared by investors. |
| Price Band | Set by an investment bank, oversubscription affects allotment. | The company sets floor prices; bids must match or exceed. |
| Changes in Bid | No cancellations or changes are allowed. | Bid specifics can be altered but not cancelled. |
| Balance Sheet Impact | Increased share capital in Equity & Liabilities. | No change in the balance sheet. |
How Does IPO Work?
Issuing IPOs Process:
Decision to Go Public: Management and stakeholders decide to raise capital for growth. Hiring Underwriters: Investment banks or underwriters manage the IPO process for pricing and regulatory compliance.
Financial Preparation: Compiling financial statements into a DRHP for insights into financial health and growth prospects.
Regulatory Approval: SEBI reviews the document for compliance with securities laws.
Pricing and Roadshow: Underwriters and the company determine the IPO price through a book-building process.
Subscription Period: Investors place orders at the IPO price during the subscription period. Allotment of Shares: Underwriters allocate shares based on order size, category, and demand.
Listing on the Stock Exchange: The Company's shares are officially listed and traded.
How does OFS Work?
Process of Seller Decision and Share Sale
- Selling shareholders decide to sell their shares to the general public.
- To notify the OFS, the selling shareholders work with the stock exchange and market regulator.
- A bidding session for investors to put bids has opened.
- Shares are allotted to the top bidders based on their offer price and order size.
- Following the allocation, the purchase money is deducted from the buyer's account and the selling revenues are credited to the seller's account.
- Share ownership passes from the selling shareholders to the new purchasers without changing the company's equity structure.
Conclusion
While both IPOs and OFS are valid ways to engage in the equity market, they serve quite different purposes. IPOs entail the issue of new shares to raise funds for the firm, whereas OFS involves shareholders selling existing shares. You can make a better-informed investing decision if you understand the difference between an IPO and an OFS. In such situations, a reliable stock market app can assist in tracking investments and market trends.
