IPO, OFS, and FPO

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IPO, OFS, and FPO 



Supplementary Note


IPO, OFS, and FPO – How are they different?


IPO

Initial Public Offering is when a company is introduced in to the publicly traded stock markets for the very first time.

The primary reason for going public is to raise capital which would be to fund expansion projects or cash out early investors. After the IPO is listed on the exchange and is traded in the secondary market, promoters of the company might still want additional capital for which there are three options available: Rights Issue, Offer for Sale and Follow-on Public Offer.


Rights Issue

The promoters can choose to raise additional capital from its existing shareholders by offering them new shares at a discounted price (generally lower than Market Price). 

it limits the company to raise the capital from a small number of investors who are already holding shares of the company and might not want to invest more.


OFS

The promoters can choose to offer the secondary issue of shares to the whole market unlike a rights issue which is restricted to existing shareholders.


FPO

Just like an IPO, a FPO requires that Merchant Bankers be appointed to create a Draft Red Herring Prospectus which has to be approved by SEBI after which bidding is allowed in a 3-5 day period. Investors can place their bids through ASBA and shares are allotted based on the Cut-off Price decided after the book building process. Since the introduction of OFS in 2012, FPOs are seldom used due to the lengthy process of approvals.using ASBA portal


Difference between OFS and FPO


o An OFS is used to offload the shares of Promoters while a FPO is used to fund new projects

o Dilution of shares is allowed in a FPO leading to change in Shareholding structure while OFS does not affect the number of authorized shares.

o Only the top 200 companies by Market Capitalisation are allowed to use the OFS route to raise funds while FPO option can be used by all listed companies

o Ever since OFS has been introduced by SEBI, FPO issues have come down and companies prefer to choose the OFS route to raise funds.

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