Understanding the Difference Between IPO and OFS: When a company goes public or decides to go public, we see dollar signs in the air ( or ₹ signs). Whether the IPO performs well or not, investors take the risk and invest in it, hoping that they’re the first ones to hold it and earn returns within a year or two.
A general understanding of IPOs is the generation of capital through public funding. This public funding is done through issuing shares through registered exchanges. Besides IPOs, there are other ways through which a company can raise funds from the stock market.
Specifically, we’re talking about Offer For Sale. But What Is The Difference Between IPO and OFS? Before we jump into the differences let us understand what the primary and secondary markets are.
What Is The Primary Market?
The primary market is where securities are listed for the first time ever i.e., they are going to be traded and bought publicly for the first time. The company which was previously private turned into a publicly listed company. Here, investors can buy directly from the issuing company.
What Is The Secondary Market?
The secondary market is the broad public perception of what we know as the stock market. Here, securities that are already listed are traded from Monday to Friday. (Excluding public holidays and weekends)
The two national exchanges, BSE and NSE are secondary markets. Read More About IPOs here.
What Is An IPO?
A basic understanding of an IPO is this –
A company wishes to raise additional funds from the share market by putting its shares for sale in the primary market for the first time. An IPO is basically the issuance of shares by a private company for the first time in order to list itself on an exchange. Here retail investors like you and I can invest in these companies through the stock market.
What Is OFS?
Now an Offer For Sale is different from an IPO although they both serve the same purpose – Raising Capital. Here a company which is already listed goes for a public offering once again.
But, an IPO raises fresh capital by issuing securities that were not there in the market before. An OFS on the other hand does not issue new securities into the market. Instead, an existing shareholder dilutes their stake in the company through the primary market.
Difference Between IPO and OFS
Let’s try to understand the Difference Between IPO and OFS below. Keep reading!
1. Cost (Expenditure to Company)
An IPO is very cash intensive, with multiple parties involved. This is apart from the company itself. Underwriters, Investment banks, regulatory bodies, legal teams, and marketing teams all involve themselves in taking the company public as well as finding buyers for the issue. The more unaware investors are about the company, the more it has to be marketed for people to be made aware of the IPO as well as its existence.
An OFS, which is usually an internal dealing, incurs the basic dealing charges that occur when securities change hands, especially since the percentage stake in the company is in question. The main concern is that the company must have the securities ready at least two days before the exchange takes place.
2. Rules and Regulations
Here are some of the top requirements to be followed in the case of an IPO:
- OFS is valid for only the top 200 companies by market capitalization. Shareholders who hold more than a 10% stake in the company are eligible for an Offer For Sale.
- SEBI guidelines state that 25% of shares of the OFS must be kept aside for Insurance and Mutual fund companies and 10% must be reserved for retail investors.
- Also, the exchange platforms need to be informed two days before the company officially announces the OFS.
An IPO works quite differently in this regard as well.
It is usually open anywhere from 3-10 days, which varies from company to company. Of the total shares issued, 35% is reserved for retail investors and each retail investor can spend a maximum of ₹2,00,000 rupees on the IPO.
3. Share Allotment
Similar to how businesses have an agreement to sell and buy each other’s services and products at a discounted price than the actual market price, in an OFS, the fair price is below the market price of the securities.
This price is discussed beforehand among the promoters of the company. This fair price is set as the threshold mark below which the shares will not be sold.
Upon deciding the base price of the security, the buyers/investors bid for the stake or give out an offer for sale, which is above the fair price set by the promoters. The winning bidder gets to buy as many shares as they want as there is no limit under OFS.
Now all investors might receive the shares at the same price or it could all be at different prices depending on the clearing costs.
4. Difference In Procedure
An IPO requires the company to use the full scale of its potential in the open market, as it’s a new source of funding. It also poses an exciting opportunity for investors to buy into the company, especially today when you can buy into an IPO online through your broker.
IPOs are particularly favoured by small companies that go public to generate capital through the public.
OFS on the other hand is used by companies that are already listed on the stock exchanges. They are not made available to the public and are usually decided by key members of the company i.e., the promoters.
Also Read: What is an IPO (Initial Public Offering) & How Does it Work?
Key Takeaway
That’s it for this blog on “Difference Between IPO and OFS”. To Read more about IPOs, check out the blog section to go into detail. Happy Investing!
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