What is the Difference Between IPO and OFS

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  • 11 Jul 2023

In stock markets, two terms often make headlines - initial public offering (IPO) and offer for sale (OFS). These are two distinct methods through which companies raise capital by allowing the general public to invest in their shares. While IPOs and OFSs may seem similar at first glance, they differ in terms of their purpose, process, and regulatory requirements.

An IPO is a process through which a privately-held company makes its shares available to the public for the first time. The primary objective of an IPO is to raise fresh capital by selling newly issued shares to investors. Companies opt for an IPO when they need substantial funds to fuel expansion, repay debt, or invest in research and development. This route also allows early investors the opportunity to realize their investments.

The IPO process involves several crucial steps. Firstly, the company selects investment banks or underwriters to manage the offering. These financial institutions help determine the offering price, facilitate marketing efforts, and ensure regulatory compliance.

The company then files a registration statement, known as a prospectus, with the appropriate securities regulatory authority. The prospectus contains comprehensive information about the company's financials, operations, and risk factors, allowing potential investors to make informed decisions.

Once the prospectus receives approval, the company embarks on an investor roadshow, showcasing its business to potential buyers. Finally, shares are allocated and listed on a stock exchange, enabling investors to buy and sell the company's shares.

  1. After the company allots the shares, investors can become shareholders

  2. The corporation decides the dividend payments, bonuses, and other benefits that the shareholders can enjoy

  3. The shares in an IPO can be sold at any time, increasing liquidity

  4. Investors can diversify their financial portfolios by allocating funds to multiple ventures

The Offer for Sale (OFS) is a straightforward method whereby promoters in public companies sell shares through the exchange platform, enabling the company promoters or owners to liquidate their shares to the public in exchange for funds.

SEBI introduced this mechanism in 2012, and by June 2013, it gained significant adoption among state-run and privately listed entities. Prior to this, only company promoters had the authority to sell off their shareholdings. However, the rules have now expanded to allow any shareholders holding more than 10% of a venture's shares to offer their stock for sale through OFS.

Anyone, including retail investors, foreign institutional investors (FII), qualified institutional buyers, business entities, and many more, can bid for OFS, which promoters of a business organization usually sell on the stock exchange platform to dilute their shareholding.

When acquiring shares in an OFS, a buyer must offer a bid to the providing company. The company establishes a floor price, and the buyer must not bid below this declared floor price. Once the bid-placing process begins, the company immediately allocates shares to their respective buyers.

Furthermore, investors need to place bids for multiple shares, rather than single shares, as OFS shares are sold in bundles.

  1. Investing through OFS is a cost-effective way with no additional charges besides basic transactional charges and taxes

  2. The application system for OFS is mostly online, minimizing the need for paperwork

  3. Investors who purchase stocks through OFS can benefit from a reduction in the market price

  4. Retail buyers who invest through OFS often receive a rebate of up to 5% on the stock price

  5. OFS is less time-consuming for the issuing entity due to its one-operational day feature

OFS

  • The purpose is to provide a convenient selling option for shareholders possessing more than 10% of the company shares. Consequently, the funds are transferred from the public to the shareholders themselves, rather than to the company.
  • No requirement to file Red Herring Prospectus or any formal paperwork.
  • Insurance companies and mutual funds hold 25% of the issued shares, while retail investors have a 10% share.
  • Minimal cost
  • Generally one trading day
  • It is market-driven and is dependent on the increasing and decreasing number of shares.
  • Low risk
  • Listed company

IPO

  • To raise capital for expansion and growth by obtaining investments from individuals in exchange for ownership of its shares.
  • The company appoints an investment bank to underwrite the IPO, and the investment bank subsequently prepares and files registration statements and a Red Herring Prospectus with the authorities.
  • Retail investors have 35% of the issued shares.
  • Relatively more costly
  • Generally 3 to 10 trading days
  • It can be fixed or variable
  • High risk
  • Unlisted company

Both IPO and the OFS offer attractive investment instruments that provide benefits such as liquidity, listing gains, voting rights in the company, and many more. Furthermore, in the case of an IPO, investors gain the first mover's advantage, while in the case of OFS, investors can access a company's historic data, which supports its market status.

However, it is recommended that investors stay cautious and thoroughly analyze the company before choosing any option to make the right choice and minimize losses.

FAQs

OFS stands for offer for sale. Here, promoters of a publicly-listed company sell shares through an exchange platform. It was introduced in 2012.

The pricing in an IPO is determined through a thorough valuation process conducted by underwriters and financial advisors. The offering price is usually set based on market demand and investor appetite.

In an OFS, the pricing is determined by the selling shareholders. They set a floor price or a minimum price below which they are not willing to sell their shares. Investors can then bid at or above the floor price, and the final price is determined based on the highest bids.

Yes, it does. Selling of OFS shares attracts Securities and Transaction Tax (STT).

Selling of IPO shares is subject to capital gains tax as per the holding period. If selling takes place before 12 months of purchase, short-term capital gains taxes are applicable. Gains above Rs. 1 lakh are subject to long-term capital gains tax (LTCG) if sold after 12 months.

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