IPO vs OFS: Difference between IPO, FPO and OFS

Suppose, you wish to expand your company's capital, and you are not getting enough equity investment from the private investors. You do not wish to take a loan from the bank or any other person. 

Then what other option is left for you to expand your capital without taking loans?

Well, here comes the Initial Public Offer (IPO), Follow Public Offer(FPO), and Offer For Sale (OFS). Wondering what exactly are these? 

Let's compare IPO vs. OFS and understand their difference by adding on FPO in the mix.

Initial Public Offering (IPO)

IPO expands to Initial Public offering. It's a method by which a private control company becomes a publicly-traded company by giving its shares to the general public for the first time to raise the fresh capital. A non-public company that includes a few shareholders shares its possession by going public by commercialising its shares. 

Through commercialism, the company gets its name listed on the stock exchange market. It means interested investors can purchase the company's shares through the stock exchange market and will become a shareholder in the company. 

Also Read: Best Upcoming IPOs in 2024

Follow on Public Offer (FPO)

Follow on Public Offer (FPO) is a process by which a listed company on the stock exchange platform can raise capital by offering new shares to the investors or the existing shareholders. In short, companies use FPO to diversify their equity base.

Let's understand this by a simple example. Suppose, you have already raised fresh capital through an IPO, and you wish to raise some more. In this situation, you can issue new shares to the investors or to your existing shareholders to raise capital. 

However you do not need to list your company this time because it is already listed on the stock exchange platform through IPO. FPO functions to expand or diversify capital without relisting due to the previous IPO.

The only difference between FPO and IPO is that an FPO is brought out by a company that is already listed.

Another similar concept that often sparks confusion is the Offer For Sale.

Offer For Sale (OFS)

An OFS is different from an IPO and an FPO because an Offer For Sale does not raise any fresh capital. In this case, an existing shareholder dilutes their stakes through the primary market.

An OFS solely ends up in a transfer of ownership from one shareowner to a different one and doesn't increase the share capital of the corporate.  

Some corporations mix their IPO with OFS to provide a partial exit to promoters and non-public equity (PE) investors.

The above image represents the basic difference between IPO, FPO, and OFS. 👆

IPO Vs OFS: How are these concepts different from each other?

Here are some of the most distinguishing features of IPO, FPO, and OFS based on prominent factors:

1. Rules and Regulations

Offer For Sale is only valid for the top 200 companies based on their market capitalisation. Non-promoter shareholders with more than 10 percent of the share are also eligible to sell their shares. 

According to the SEBI's guidelines, 25 percent of the shares in OFS should be reserved for the insurance companies and mutual funds, and 10 percent of shares must be reserved for retailers. 

Before issuing a notice for OFS, promoters need to inform the stock exchange platforms two days before announcing it. 

An Initial Public Offer (IPO) is valid for 3-10 days to purchase shares, where 35% of the shares are reserved for retail investors, and the maximum amount a retail investor can spend is 2 lakh rupees.

A Follow on Public Offer (FPO) bidding goes for 3 - 5 days for all the listed companies. Investors can place their bids through the ASBA portal through internet banking or apply online through bank branches and shares are allotted based on the cut-off price after the book-building process. You can get shares at a lower price than the market price.

2. Procedurally Different

IPOs are mostly used by companies that require visibility in the listing on stock exchange platforms. Mostly, small companies utilise IPOs much more openly and frequently than well-renowned companies.

This happens because most small companies are still in the initial stages of growth and require the attention of investors to grow.

We already know that companies who sanction an IPO are a great gateway for investors to buy shares, so an IPO works as an advantage for small businesses that have the potential to grow shortly. 

On the other hand, FPO and OFS are utilised by companies that are already listed on stock exchange platforms. Mostly, small companies that would have applied for IPO in its initial stages utilise their already listed status further by using an FPO after attaining a good name for themselves.

The keyword 'after' is used as small companies apply for FPO and OFS when they have gained a good name; however, it is much easier and less hazardous for a company with a good reputation to do this.

3. Cost

The cost incurred by the promoter and investor within the company throughout an OFS resembles a token economy. The sole demand is for the corporation to possess the exchanges up to 2 days beforehand. The capitalist, during this case, incurs solely the regular dealings charges.

An Initial Public Offering (IPO) is preceded by a lot of promotional material activities to induce the word out. The more obscure the corporate is, the larger tough it'll face and, hence, are going to be needed to pay a great deal quite before at this stage. The appointment of an associate degree underwriter and different SEBI formalities adds to the expenses during this case additionally. 

Whereas whenever a company issues an FPO and sets a base price, the investors need to fulfil and meet this base price to buy the shares which the company has issued an FPO for. After these shares are bought (at the price that was decided and agreed upon by the company and the buyer), this money is not instantly cut from their credit.

Instead, the money is deducted only when everything has been finalised through an online portal, which, in terms of finance, is called an ASBA (Application Supported By Blocked Amount; ASBA is an alternative mode of payment in which the application's money of the investors does not deduct until his allotment of shares is finalised)

However, before all these shares are bought, they have to be promoted to get investors' attention without letting an FPO issue go to waste. This further means that the company has to spend a little money on promotional material for their sales within the market.

4. Allotments of the Shares

Before the commencement of the OFS, the promoters within a company discuss a fair price for the shares that becomes the threshold mark (or the baseline) mark that needs to be paid. This price or the baseline mark is always less than the market price. To understand this, consider how small businesses in a market sell the same product as larger companies but at a more reasonable price, which the customers much prefer.

Now, these shares follow two routes: either all the investors receive the shares of the same cost (single value clearing), or they all receive shares at different values, where values are decided on individual preferences (multiple clearing costs).  

In an initial public offer (IPO), the value band (the base price) here is set by the investment bank before the initial offering. This can be understood by the example of the 'YES' bank where, when they launched the FPO to raise 15 thousand crores, they changed their initial price of twelve rupees to thirteen rupees per share. 

To the naked eye, the difference of one rupee doesn't hold any value, but in the market of finance, every penny counts. The bank initiated this change and made it exclusive to only the works of the bank under the worker reservation portions.

IPO Vs FPO

Here are some additional factors that make FPOs stand out compared to IPOs:

a. Lower Risk (potentially):

Since the company is already established and has a track record, FPOs can be perceived as a slightly less risky investment for investors compared to IPOs of completely new companies. Investors have more information about the company's performance and future prospects.

FPOs also get influenced based on how the IPO performed.

b. Faster Process:

 The FPO process is generally faster and less complex than an IPO, as many regulatory hurdles have already been crossed during the initial public offering.

c. Market Impact:  

A successful FPO can be a positive signal for the company's stock price, indicating investor confidence in its future growth potential.

d. Existing Shareholder Diversification:  

FPOs can allow companies to diversify their investor base by bringing in new institutional or retail investors.

The Bottom Line

To sum up everything, an IPO is a method through which a private company makes its shares public to investors through a stock exchange platform to raise fresh capital.

An FPO is used when an already listed company (that means a company that is listed on the stock exchange platform) wants to expand its capital and diversify their shares.

Lastly, an OFS is a method through which a promoter (an individual who is mostly the founder of the company) wants to reduce their holding shares (that means this person requires money, so he/she wants to reduce his stakes within the company).

You can see this video for more information on IPO vs OFS.

All these methods make sure that there is a continuous expansion that a small or big company can utilise in whatever way they wish to.  

Keeping this in mind, these methods have their advantages and disadvantages at every front. It is the company or the individual within the company who must decide which method is the most suitable for their needs and would benefit them all as a whole.