Offer for Sale (OFS) vs IPO: An IPO has always been popular and preceded with loads of razzmatazz to impress the investors considering the stock. An investor in India may purchase a stock from the Primary market during such public offerings. Moreover, in other cases, they can take advantage of a situation while stock already trading in the secondary market. The SEBI in 2012 brought forward Offer for Sale (OFS). This allowed promoters to sell their shares directly in an exchange instead of waiting for a public offering.
Today we look at OFS and public offerings and their attributes. In this article, you’ll learn what exactly is OFS and how to differentiate Offer for Sale (OFS) vs IPO. Let’s get started.
Table of Contents
What is an OFS and a Public Offering?
The OFS (Offer for Sale) was introduced to allow promoters to dilute their investment in a company through simpler means. Soon other shareholders who hold more than 10% in a company were also allowed to benefit from OFS. However, OFS is currently limited to only the top 200 companies (in terms of market capitalization).
Public Offering are of two types. The Initial Public Offering (IPO) and Follow on Public Offer (FPO). In a Public Offering, the company offers shares to investors in exchange for capital. A Public Offering is one of the means for a company to raise further capital.
Any company that fulfills the requirements of the SEBI can go public. IPO is the first time a company raises equity capital through means of public offering. After an IPO if the need arises for capital the company can still raise equity capital by means of FPO (Follow on Public Offer).
Also read: Is it worth investing in IPOs?
Differences between Offer for Sale (OFS) vs IPO
Here are the most distinguishing features between Offer for Sale (OFS) vs IPO based on prominent factors:
1. Purpose
OFS (Offer for Sale): The purpose of an OFS is to provide shareholders holding more than 10% with an easy alternative to sell their stake in the company. This is especially used by government companies to reduce their holdings in a transparent channel through an exchange. None of the amount raised from investors is transferred to the company. It is instead transferred to the promoter to suit his needs in exchange for the ownership he had.
Public Offering: A company goes for IPO or an FPO to raise capital for its growth and expansion needs. The amount, in this case, moves from the investors to the company in exchange for ownership through shares.
2. Regulations
OFS (Offer for Sale): In an OFS, it is necessary for the company to inform the exchange 2 working days (bank) before the OFS takes place. The ability to indulge in an OFS is available only to the shareholders who hold more than 10% stake in the company. The OFS takes place on the trading day.
25% of the shares undergoing an OFS are reserved for mutual fund and insurance company purchases. However, no single bidder (Mutual Fund or Insurance Company) can get more than 25% of the shares in OFS. The OFS takes place in one trading day. 10% of the shares in OFS are saved for retail investors. The maximum cumulative bid a retail investor can make is 2 Lacs.
Public Offering: An IPO is generally lengthier and takes 3-10 days to take place. An IPO requires an Investment Bank to be appointed for underwriting the IPO. This is then followed by registration with the SEBI and drafting a prospectus. 35% of the shares issued are reserved for retail investors. The maximum amount that can be invested by a retail investor in a public offering is 2 Lacs.
3. Cost
OFS (Offer for Sale): The cost incurred by the promoter and shareholder in the company during an OFS is minimal. The only requirement is for the company to have the exchanges informed two days in advance. The investor, in this case, incurs only the regular transaction charges.
Public Offering: An IPO is preceded with a lot of advertisement activities to get the word out. The more obscure the company is the greater difficulty it will face and hence will be required to spend higher at this stage. Appointment of an underwriter and other SEBI formalities adds to the expenses.
4. Allotment
OFS (Offer for Sale): The company is to provide the floor price before the OFS takes place. That is T-2 or T-1 with ‘T’ being the day of the OFS. The floor price is the price at and above which the investors are allowed to bid. The investors generally receive a discount of 5% on their bids. If the investors bid an amount below the floor price the bid gets rejected. The investor is allowed to change the specifics of the bid throughout the day. But no cancellation can be made.
In case of oversubscription two types of allotment may be made
- Single Clearing Price: Here al the investors are allocated shares at the same price but on pro-rata basis
- Multiple Clearing Price: In this case, the investors with higher bid are given preference. This goes on till the subscriptions are full.
Public Offer: The price band here is set by the investment bank prior to the IPO. In the case of oversubscription, the shares are allotted based on a pro-rata basis or automated lottery system.
5. Effect on the Balance Sheet
OFS (Offer for Sale): In the case of an OFS, there is no change in the Balance Sheet. Here the company does not raise any additional capital. The same number of shares that may have been with a respective promoter will be present now in the hands of the new shareholders via. OFS.
Public Offering: When shares are issued in a public offering the Balance Sheet of the company will now have increased share capital under Equity and Liabilities and the asset side Cash and Cash Equivalents will account for the cash coming in.
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Closing Thoughts
An OFS and Public offering both are attractive from an investor perspective. This is considering the discounts received in an OFS and investors making first movers advantage in the case of Public Offering. However, investors must still beware and consider investing only after a thorough study of the company. Both these methods might be used by promoters and venture capitalists as an escape strategy when they do not see future prospects in the company.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
