IPO vs. OFS

Buying and selling shares is the main process for investors to earn profits in the stock market. The main idea is to buy shares when their price is low, sell them when the price rises, and profit from the price difference. You can only buy and sell shares that are listed on the stock exchanges, such as NSE and BSE. However, investors also look to profit from the shares a company sells for the first time to raise funds. The process called Initial Public Offering (IPO) allows companies to raise funds and become public. However, some current shareholders may sell existing shares to seek an exit and get personal funds. These two processes, called IPO and OFS, allow investors to buy the company's shares and profit from the capital appreciation and other perks such as bonuses and dividends.
 

If you are a stock market investor, it is crucial to know IPO vs OFS to make better investment decisions. This blog will help you understand the difference between IPO and OFS and how they both can help you achieve your investment goals.

• An IPO (Initial Public Offering) is the process where a company issues new shares to the public for the first time to raise capital.
• An OFS (Offer for Sale) is a method where existing shareholders sell their shares in a company to the public without the company issuing new shares.
• As investors can apply to IPOs and OFS, it is important to know the difference between them before applying.

An initial public offering (IPO) is a stock market process where companies that are privately held by owners, directors, and promoters sell a portion of the shares to the general public to raise money. In an IPO, the shares are sold based on a price band, which is a price range with minimum and maximum per share price. Companies come out with an IPO after seeking the permission of SEBI, which approves its Draft Red Herring Prospectus (DRHP) and Red Herring Prospectus. The main idea behind coming out with an IPO is to raise funds for various business activities.

An Initial Public Offering (IPO) is the procedure through which a private company becomes publicly traded by offering its shares to the general public for the first time. A company first decides that it needs to raise capital by offering its shares to the general public. The main idea behind raising capital is to have funds for various business expenses such as expansion, paying off debt, or providing an exit for early investors. The company hires underwriters like investment banks to manage the IPO. Underwriters determine the type of securities to be issued, the number of shares to be offered, and at what price.

The company and underwriters prepare a detailed document called a prospectus, which provides potential investors with information about the company’s business model, financials, risks, and use of the funds raised. This prospectus is filed with the securities regulator, such as the Securities and Exchange Board of India (SEBI). Afterwards, investors apply to the IPO issue and are allotted shares based on their subscription status. If they are allotted shares, they become shareholders and can buy and sell them on the day the shares are listed or any trading day after that.

Read more: How to apply for an IPO online

Offer for sale (OFS) is a stock market process where current shareholders, such as promoters and institutional investors, sell their existing shares to the general public. OFS is generally launched to offer an exit to large shareholders who have been holding the shares of the company for a long time. Unlike an IPO, where the money raised goes to the company, the money raised through an OFS goes directly to the shareholders who are selling their shares. Hence, in an OFS, no new shares are created, and only existing shares are sold by current shareholders.

A company launching an OFS makes a public announcement, providing details such as the date, the number of shares on offer, the floor price (minimum price), and the offer period. Retail investors, institutional investors, and high-net-worth individuals place bids at or above the floor price. Sometimes, the company may offer a discount to retail investors to encourage participation.

Read more: The benefits of investing in IPO in India 

Here are the key differences between IPO and OFS:

• Purpose: The main purpose of an IPO is to allow a company to raise capital for various expenses. OFS allows existing shareholders to sell their shares and receive the funds personally.
• Share issuance: In an IPO, new shares are created and offered to the public, while in an OFS, no new shares are created, and only existing shares are offered.
• Regulatory process: IPO sees an extensive regulatory process by SEBI that requires prospectus approval. On the other hand, OFS is not subject to extensive regulatory scrutiny.
• Pricing: In IPOs, the share price is determined through book building or fixed-price methods, while prices in OFS are determined through a bidding process. 

Here are the benefits of choosing an IPO:

• Early investment opportunity: Investors can buy shares at the initial offering price, potentially leading to significant gains if the company performs well post-IPO.
• Diversification: IPOs offer investors a chance to diversify their portfolio by investing in new sectors or industries at a lower initial price.

• Long-term growth: Investing in IPOs can help realise long-term gains if the company continues to grow in the future.

  
  

Read more: What is IPO subscription and what does it indicate

Now that you know what is OFS, here are the benefits of choosing OFS:

• Discounted price: OFS shares are generally offered at a discounted price compared to the current market price, providing an opportunity to buy at a lower cost.
• Access to Promoter Holdings: Investors can buy shares directly from promoters or major shareholders, which can be beneficial for making profits.
• Quick investment process: The OFS application and investment process is quick and offers faster credit and listing of shares.

Read more: What is the difference between equity IPO vs debt IPO 

IPO and OFS are stock market processes that help companies or existing shareholders sell their shares and receive funds in return. IPOs allow companies to raise funds for various business activities, while OFS allows existing large shareholders to sell the shares they hold to receive funds. Although the difference between IPO and OFS is substantial, they can benefit investors as they can invest in the shares offered in both processes and potentially make profits. However, it is important to analyse both issues extensively before investing.

Related Articles:

• How to Apply for an IPO Online
• The Benefits of Investing in IPO in India
• What is IPO Subscription and What Does It Indicate
• What is the Difference Between Equity IPO vs Debt IPO