Imagine you have created a blueprint of revolutionary plans for your company. However, now, you are falling short of capital to continue with timely and expected execution. You may consider taking funds from private investors or applying for a loan when looking for options. But these options don’t always work for your benefit.
What else could be done then? When stuck in such a situation, most people strive toward Initial Public Offering (IPO). Such market jargon is generally confusing for many people, especially newcomers.
IPO is quite a prevalent term as it means that a firm is getting listed on the share market to raise capital. This company will be issuing shares and selling them to investors who will own a specific amount of the firm. The number of shares will get decided by the firm during the time it will be applying for listing.
However, now that the firm has been listed and managed to raise capital doesn’t mean financial troubles have ended. In the future, it may need more money for other means, like expansion, new products, investment, etc. Thus, what can be done in this case?
The answer usually is an Offer for Sale (OFS) and Follow Public Offer (FPO). While the terms are not the same, their intentions could be similar. And, since not many people know them, in this post, let’s talk about them and highlight the difference between OFS and FPO.
What is an Offer for Sale?
SEBI first introduced it in 2012. Before that, the option of OFS was only for promoters of listed companies. However, it is now available for non-promoters as well. The sole intention of introducing OFS was to decrease the stake of promoters in the firm while complying with the basic norms of public shareholding.
A company can provide the secondary issue of shares to the entire market, contrary to issuing rights limited to existing shareholders. Herein, companies raise assets by providing new shares. Or, advertisers can sell current stakes.
The number of shares neither decreases nor increases through OFS. This is a simple exchange of shares between two people. For the OFS, the stock exchange offers a different window through the stockbrokers.
Under this method, the company sets a floor price above or at which both non-retail and retail investors will have to make bids. The shares will be allotted if the bids are either at or above the cut-off price. The exchange settles the allotment into the investor’s Demat account in T+1 days.
Rules for OFS:
If you are considering this option, you must keep these rules in mind:
- This facility is only for the top 200 companies available in the share market based on the market capitalisation ranking.
- With OFS, the exchange lets a company route capital via OFS only if it wishes to sell its holdings or/and maintain minimum public shareholding requirements (25%).
- Also, only such investors or advertisers who hold more than 10% of the company’s offer capital can use this issue.
What is Follow on Public Offer (FPO)?
An FPO works with the same intention of raising funds after the company has been listed. However, the method for the application and allotment of shares is different. Under this method, either the firm provides existing shares to investors or sells new shares. This means it can either be a non-dilutive FPO or a dilutive FPO. A Follow on Public Offer aims to raise funds to pay past commitments or ensure the growth of the business.
Similar to an IPO, the FPO needs a merchant banker(s) to create a draft red herring prospectus that should be approved by the Securities and Exchange Board of India (SEBI). Post that, the bidding starts for 3-5 days.
Investors get to place bids via an Application Supported by a Blocked Amount (ASBA), and shares get allotted on the basis of the cut-off price as decided once the book-building process is completed.
For instance, let’s assume you have raised capital via an IPO and wish to get more funds. In such a situation, you can issue new shares to existing or new investors to get this amount. However, this time, you will not have to list the firm on a stock exchange as it is already there through IPO.
Rules for FPO:
- One cannot issue FPO before getting the company listed on the stock exchange.
- If the business product is changed, it must go into the FPO.
- A major portion of FPO should be fixed for Qualified Institutional Buyers (QIB).
- The total funds raised through FPO should not be more than five times the company’s net worth at the end of the last financial year.
Difference Between OFS and FPO
Here is the difference between OFS and FPO for your reference:
| Metrics | Offer for Sale (OFS) | Follow Public Offering (FPO) |
| Objective | To raise capital by selling shares owned by shareholders | To raise capital by selling shares owned by shareholders |
| Multiple Bids | Shares get sold in bundles, meaning the sellers will have to bid for these bundles and not a single share | Multiple bids cannot be bids |
| Uses | Offload the shares of promoters | Fund new projects |
| Prospectus | Doesn’t need to file a prospectus or formal paperwork | Needs a formal prospectus and must get approval from SEBI before issuing shares |
| Time Taken | Single trading session | 3-5 days |
| Charges | Brokerage and STT charges are applied | Charges for the hiring manager and filing with SEBI |
| Dilution | Shares can be diluted and lead to changes in the structure of shareholding | No impact on the number of shares that have been authorised |
| Price | The firm decides on a floor price, and all the bids below this price get rejected | The firm decides on a price band, and the bids should be placed within this band |
| Who can use it? | Can be used by the top 200 firms by market capitalisation | All listed firms can use |
| Application | Bids can get placed on the day of the sale | Investors must put in an application in advance |
| Payment | Payment should be made upfront the moment bids are placed, and the money is returned if the investor didn’t get the allotment | Payments are made via the ASBA method, and the full payment is made once the shares have been allotted |
IPO vs OFS vs FPO
Among these three primary concepts, there are some significant differences that you must know:
- When it comes to IPO, not a lot of details are available about the firm unless it is established already. For instance, when TCS launched its IPO in 2004, it was an internationally known organisation already. But, most IPOs are from small-scale firms that intend to gain more visibility by listing on the stock exchange. As far as OFS and FPO are concerned, the firms in question are already established and leveraging their brands.
- In the past few years, the most prevalent type of OFS is by the Public Sector Undertaking (PSU) firms, where the government has decreased its holding through the primary market. In most situations, firms are established and respected in the market. The government is majorly depending on the OFS method for divesting its shares in PSUs.
- Considering that an OFS doesn’t raise fresh funds and is a change of ownership, the regulatory compliance here is lower than FPO and IPO. While FPO and IPO remain open for 3-5 days, the OFS gets wrapped in a day.
The Impact on Earnings Per Share (EPS) of a Company After OFS and FPO
There are two methods to calculate the EPS, such as:
- Dividing the profit after tax (net income after tax) by the total outstanding number of shares
- Deducting net income after tax from total dividend divided by the total number of outstanding shares
Under the OFS method, no new shares get created, and only the existing shares are offered. Thus, there will be no impact on the EPS of the company as the total number of outstanding shares will be the same after OFS. For instance, if a firm’s income after tax was Rs. 20 lakhs and it had 400,000 outstanding shares, the EPS would be Rs 5 (20,00,000 / 400,000). Post the OFS, the total number of shares will remain at 400,000; thereby, no effect on EPS.
On the other hand, if the firm in the above example has come with a dilutive FPO by providing an offer to create 200,000 new shares and makes 600,000 as the total outstanding shares with the same income after tax (Rs. 20 lakhs), the EPS will be Rs. 2.50.
Frequently Asked Questions (FAQs):
Q. What is the difference between OFS and IPO?
OFS is an Offer for Sale, whereas IPO is Initial Public Offering. OFS is a type of IPO. In both scenarios, new shares are made available in the market for the public to purchase. The types of companies choosing IPO could differ from those choosing OFS.
Q. What is the difference between IPO and FPO?
FPO, known as the follow on public offering, is nothing but the follow-up of the IPO. It is the share issuance post the company has been listed on the stock exchange. In simple words, while the IPO is the first or initial issue, the FPO is an extra issue.
Q. Is OFS better than IPO?
Considering that the OFS doesn’t comprise raising new capital and is only a change of shares’ ownership, the regulatory compliance under this method is lower as compared to FPOs and IPOs. Unlike the other two prospects, it also gets wrapped up within a day. So, if you don’t want to spend a lot of money and wish to finish the process soon, OFS will be a better choice for you.
Q. Can we sell OFS shares?
No, in an OFS transaction, you can only purchase shares and not sell them.
Q. Is FPO profitable?
As compared to an initial public offering, the FPOs are less profitable. The reason behind it is that once a company reaches this phase, it becomes stabilised. However, it might vary from company to company.
Q. What are the two types of FPO?
The two types of FPOs are dilutive FPOs and non-dilutive FPOs. The former means that new shares can be added, and the latter means that existing private shares will be sold publicly.
Q. How does OFS affect share price?
Generally, the offer price of a security in OFS is set under its ruling price to get more investors on board. This act, amalgamated with the probability of their capital turning appreciative, attracts retail investors towards OFS. Hence, the share price gets affected.
Q. Who can take part in FPO?
Market participants, such as insurance companies, qualified institutional buyers, FIIs, individuals, and mutual funds, can bid for the FIP. However, promoters can only be sellers in this procedure and cannot buy anything.