What is Difference Between IPO and OFS?

What is Difference Between IPO and OFS?

When talking about stock market investments, there is a variety of jargon and abbreviations doing the round. However, out of all, Initial Public Offering (IPO) and Offer For Sale (OFS) are two of the fundamental terms that every investor should know before putting their money on the market. 

These two are significant concepts used by companies for the purpose of raising funds from the equity market. In this post, let’s find out what exactly these are and the difference between IPO and OFS. 

What is Initial Public Offering?

Abbreviated for Initial Public Offering, IPO is a method through which a private company turns into a publicly-traded one by offering shares to the general public in exchange for capital. Through this commercialism, the firm gets listed on the stock exchange market. This means that investors get to buy shares of the company through this stock exchange market and become shareholders in the firm.

Generally, an initial public offering is used by small companies than renowned ones, as the former firms are still at the initial stage of growth and need more attention from investors. With IPO, the general window to buy shares is 3-10 days. Herein, 35% stakes are for retail investors who cannot spend more than Rs. 2 lakhs on buying the shares. 

The entire process has to undergo a variety of promotional material activities to get the word out. Moreover, appointing an underwriter and fulfilling the formalities of the Securities and Exchange Board of India (SEBI) add more to the expenses. 

Types of IPO

There are two types of IPOs available, such as:

  • Fixed Price Issue

Under this IPO type, everybody knows the price of a share as decided by the firm before going public. By fixed price issue, it means that the firm has set a fixed price for all of its shares and has mentioned the same in the offer document as well. Investors pay the total fixed price when subscribing to a company’s IPO.

  • Book-Building Issue

Contrary to the fixed price issue, companies don’t fix the price but come with price bands under the book-building issue. The price is decided after generating and documenting the investor’s demand. 

What is Offer For Sale?

Unlike an IPO, the Offer For Sale (OFS) does not intend to raise fresh capital. Under this method, existing shareholders get a chance to dilute their stakes via the primary market. An OFS ends up in a transfer of ownership from one shareholder to another and does not increase the company’s share capital. Some companies even mix their IPOs with OFS to offer a partial exit to non-public equity investors and promoters.

OFS is for the top 200 companies based on market capitalisation. Non-promoter shareholders with more than 10% of shares can also sell their stakes. Per the guidelines of the Securities and Exchange Board of India (SEBI), 25% of the stakes in OFS should be for mutual funds and insurance companies, while 10% should be for retailers. 

Before launching the notice for OFS, the company must inform the stock exchanges two days before the announcement. Generally, this method is used by firms that have been listed on the stock exchange already. 

Difference Between IPO and OFS

To understand the difference between IPO and OFS, here are some of the distinguishing factors:

Factor IPO OFS
Objective To raise capital for the expansion and growth requirements. The amount goes to the company from the investor in exchange for the ownership of shares.  To offer an easy alternative to shareholders with more than 10% holding to sell their shares. No amount is transferred to the firm but to the promoter to suit the needs in exchange for their ownership. 
Rules & Regulations An investment bank should be appointed for IPO underwriting. And then, it should be registered with the SEBI, and a prospectus should be drafted.  The company must inform the exchange 2 days before executing the OFS. 
Share Reserves  35% of issued shares are for retail investors 25% of shares are for mutual funds and insurance companies, and 10% of shares are for retail investors 
Time Taken It gets completed in 3-10 days It gets completed in one trading day
Cost Comes with high expenses, which include advertising activities, hiring an underwriter, and completing SEBI requirements It comes with minimal expenditure, and the investor has to bear regular transaction charges
Price Band The investment bank sets the price band before launching the IPO. If there is an oversubscription, the allotment of shares is based on the automated lottery system or pro-rata basis.  Before execution, the company should provide a floor price, which is T-2 or T-1, with T being the trading day for the OFS. Investors should bid at or above the floor price. Bidding below the floor price leads to rejection. 
Changes in the Bid No changes or cancellations can be made.  An investor can change the bid’s specifics but cannot cancel it
Impact on the Balance Sheet Increased share capital under the Equity and Liabilities category  No change in the balance sheet 

Wrapping Up

To sum it up, an initial offering is a method through which a private entity goes public and provides its shares to the public through stock exchanges with the intention of raising fresh capital. And an OFS is a process that is used by a promoter who wishes to decrease their holding shares. 

From the perspective of an investor, both the IPO and the OFS are attractive instruments for investment. As far as IPO is concerned, investors have the first mover’s advantage, and the OFS offers a considerable discount. 

However, before choosing any option, you must stay cautious and consider every aspect thoroughly. Understand the company beforehand and weigh your options to make the right choice. 

Frequently Asked Questions (FAQs):

Q. Which is better, OFS or IPO?

Keeping in mind that OFS doesn’t involve raising funds and is a change of ownership, the regulatory compliance here is lower as compared to the IPO. OFS is completed in a day, and IPO takes between 3-10 days. Depending upon your requirements, you can choose one option. 

Q. Is OFS an IPO type?

No, OFS is not a type of IPO but a different method altogether. You can bid in an OFS through an online trading portal or place a bid with your dealer. It doesn’t require any documents, unlike IPOs. You will only have to provide the price and quantity at which you wish to invest in an OFS. 

Q. Can we sell OFS shares?

No, in an OFS transaction, investors only get to purchase shares but cannot sell them. 

Q. Can an IPO be an offer for sale?

No, an IPO cannot be an offer for sale. You can subscribe to the OFS only via a broker. On the other hand, an IPO can be subscribed to either through a physical form or a broker. 

Q. Is OFS taxable?

Yes, the transfer of OFS shares comes under the Securities Transaction Tax (STT). 

Q. What is the cutoff price in OFS?

A cutoff price is a rate at which the stakes are offered to non-retail investors. This rate is zeroed down at the end of the first day of OFS. 

Q. Is IPO tax-free?

When you buy IPO shares, there will be no taxes whatsoever. However, once you sell the shares, they will be taxed as capital gains. If you sell shares 12 months after their purchase, you will have to pay LTCG tax at 10% over Rs. 1 lakh and the STCG is applied at 15%.