Differences Between IPO and OFS Explained in Detail
IPO (Initial Public Offering) and OFS (Offer for Sale) are two fundamental instruments commonly used by business organisations to raise capital by listing shares. Although they do serve a common objective, they have distinct working mechanisms and cash flows.
The section below provides a more comprehensible approach towards their differences and how they benefit a corporation and an investor.
What Is an IPO?
The process by which a private or unlisted company puts up its stock or ownership to the general public in exchange for funds is called IPO (Initial Public Offerings). This happens when a company decides to raise funds through the sale of shares and securities for the first time.
Generally, the company issuing stocks to the public is commonly known as the issuer. Moreover, this organisation need not necessarily be a new entity to get listed on IPO.
How Does an IPO Work?
IPO initiation takes place generally to ease trading, raise capital or monetise investments of existing shareholders. These first sales of shares can be accessed by High Net-worth Individuals (HNIs), institutional investors, and the retail investors. Once the IPO is done, these shares of the business entity get listed in the open market and can be traded freely.
As stated before, the process of IPO starts when a company is ready to sell its shares to the public through a stock exchange. However, before this, the company has to undergo an auditing session considering all its finances. If everything is in order, then it can prepare a registration statement and file it to its appropriate exchange commission.
Finally, SEBI reviews the registration application and after considering the company’s financials, it approves or rejects this request.
What Are the Benefits of Investing in an IPO?
The benefits of IPO are as follows:
- Investors can become shareholders of the company after the shares get allotted.
- The shareholders can enjoy dividend payments, bonuses and other benefits as decided by the corporation.
- It increases liquidity, as the shares in an IPO can be sold at any time.
- Investors get to diversify their financial portfolios by allocating funds to multiple ventures.
What Is an OFS?
A simple method wherein promoters in public companies sell shares through the exchange platform is called the OFS (Offer for Sale). Therefore, the company promoters or owners can liquidate their shares to the public in exchange for funds.
This mechanism was first introduced by SEBI in 2012 and was largely adopted by both state-run and privately listed entities by June 2013. Previously only company promoters were allowed to sell off their shareholdings. However, now, any shareholders with more than 10% of a venture’s share can offer their stock for sale through OFS.
How Does an OFS Work?
OFS can easily be bid by anyone including retail investors, foreign institutional investors (FII), qualified institutional buyers, business entities, and many more. Here, promoters of a business organisation usually dilute their part of shareholding by selling it on the stock exchange platform.
While acquiring shares in an OFS, a buyer has to offer a bid to the providing company. Here, the company sets a floor price and the buyer cannot bid anything below this declared floor price. Once the bid-placing process starts, shares are immediately allocated to their respective buyers.
In addition, OFS shares are sold in bundles. Therefore, investors need to place bids for multiple shares, rather than single shares.
What Are the Benefits of Investing in OFS?
The benefits of OFS are as follows:
- A cost-effective way of investment as it requires no additional charges other than basic transactional charges and taxes.
- It involves minimum paperwork as the application system is mostly online.
- Investors can enjoy a reduction in the market price, after purchasing stocks through OFS.
- Retail buyers investing through OFS usually enjoy a rebate of up to 5% on the stock price.
- Due to its one-operational day feature, it is less time-consuming for the issuing entity.
What Are the Differences Between IPO and OFS?
The differences between IPO and OFS are given below in detail:
|Basis of Comparison||IPO||OFS|
|Objectives||To raise capital for the expansion and growth of a company where the amount comes from the investors in exchange for the ownership of its shares.||To offer an easy-selling alternative to shareholders having more than 10% of the company shares. Therefore the amount is transferred from the public to the shareholders and not the company.|
|Rules and Regulations||Appoints an investment bank for IPO underwriting which then prepares and files registration statements and a Red Herring Prospectus with authorities.||No need to file a Red Herring Prospectus or formal paperwork.|
|Share Reserves||35% of issued shares are for retail investors.||25% of issued shares are for insurance companies and mutual funds, whereas 10% are for retail investors.|
|Time Consumption||3-10 trading days||one trading days|
|Cost Involved||Relatively Costly||Minimal charges|
|Price Band||Fixed or variable||Market-driven and depends mostly on the increasing and decreasing number of shares.|
|Balance Sheet Impact||Share capital increases||No impact|
|Changes in Bid||No changes or cancellations allowed||Changes are allowed but not cancellation|
|Risks Involved||Comparatively high||Comparatively low|
|Company Status||Unlisted Company||Listed Company|
From an investor’s perspective, both the IPO and the OFS are attractive investment instruments offering benefits like liquidity, listing gains, voting rights in the company and many more. Moreover, in the case of an IPO, investors get the first mover’s advantage, while in the case of OFS, investors have access to a company’s historic data supporting its market status.
However, before choosing any option, it is recommended to stay cautious and analyse the company thoroughly for making the right choice and minimise losses.
Frequently Asked Questions
Is buying an IPO a good idea?
Yes, investing in an IPO is a good idea if you are confident about the company’s price fairness and capability. It is also a source of earning higher profits in the long term. To minimise losses you must conduct thorough research and analyse a company’s growth prospects before investing.
Is investing in an IPO tax-free?
While purchasing IPO shares, there will be no taxes, but, while selling these shares, they will be taxed as capital gains. However, if you sell these shares before 12 months of their purchase, STCG tax of 15% will be charged. If you sell these shares after 12 months of their purchase, an LTCG tax of 10% (over ₹1 lakh) will be charged.
Is investing in OFS tax-free?
No, investing in OFS is generally not free from tax. The sale of OFS shares is generally subjected to Securities and Transaction Tax (STT). However, there will be no taxes charged while purchasing these shares from their respective companies.
Is it ideal to invest in OFS?
Investing in OFS can be ideal for retail investors who seek quick trade settlements. Retail investors are also often offered a discount on the floor price while applying for these shares and the discount can go up to 5% as well.