BAJAJ BROKING
August 30, 2024
8 mins read
An Initial Public Offering (IPO) is when a company sells its shares to the public for the first time, getting new money for expansion. A Follow-on Public Offering (FPO), on the other hand, happens when a company that is already on the stock market wants to issue more shares to gather extra funds. Basically, IPOs represent entering the stock market by selling company shares publicly for the first time while FPOs are about continuing the process of selling more shares after being listed on the stock market already. An Offer for Sale (OFS) allows current shareholders to sell their shares directly to the public through the stock market, without the company getting additional funds.
Have you ever wondered how businesses gather funds in order to flourish in the stock market? This guide looks at three main ways of doing so: Initial Public Offerings (IPO), Follow-on Public Offerings (FPO), and Offer for Sale (OFS). An IPO represents the first time that a company offers for sale its shares to the public on the stock market. FPOs give companies, which are already on the stock market, a way to get more money by offering new shares again. This is the major distinction between FPO and IPO. On the other hand, OFS means that current shareholders sell their shares on the market, with the company itself raising no additional capital. Knowing the answer to questions such as “what is follow on public offer (fpo)”, along with the key differences between IPO vs OFS and OFS vs FPO will allow you to use your financial knowledge to your advantage while dealing in the stock market.
An IPO is a crucial time for a company as it transitions from being privately held to publicly traded. This process allows a company to raise capital by offering for sale shares to the public for the first time. The company generates hype through strategic announcements and media coverage to create interest among potential investors in anticipation of an IPO investment. Following this, the company files a Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI). This document is crucial as it provides comprehensive details about the company's financial health, business model, future plans, and the number of shares being offered.
Once SEBI reviews and approves the DRHP, the subscription period commences, during which investors can submit bids to purchase shares at a predetermined price for their IPO investment. This phase is critical as it determines the demand for the shares and the eventual price at which they will be allotted. After the subscription period closes and shares are allotted to investors, the final step is the listing of the company's shares on a stock exchange.
An FPO is an additional issuance of shares by a company that is already publicly listed, unlike an IPO where shares are issued for the first time. This is the major point of difference between FPO and IPO. This process is used by companies to raise extra capital for various strategic objectives such as debt repayment, business expansion, or acquisitions. The FPO process begins with the filing of a Draft Red Herring Prospectus (DRHP) with SEBI, similar to the IPO process.
Following SEBI’s approval of the DRHP, the company opens a subscription period during which investors can place bids for the new shares. The subscription process for an FPO is similar to that of an IPO, where the demand for shares influences the final pricing and allocation. After the subscription period concludes and shares are allocated, the newly issued shares are listed on the stock exchange, increasing the company’s total number of shares available for trading. Investing in an FPO can be attractive as it provides an opportunity to invest in a company with an established track record and potentially benefit from its future growth. This should answer the question, “What is follow-on public offer”.
An OFS is a mechanism used by existing shareholders of a company, such as promoters or institutional investors, to offer for sale their shares to the public through the stock exchange. Unlike FPO and IPO, an OFS does not involve the issuance of new shares or the raising of fresh capital by the company. Instead, it provides a platform for current shareholders to liquidate their holdings, thereby increasing the public float of the company’s shares. The OFS process is streamlined and typically faster than FPO and IPO, involving fewer regulatory requirements and less procedural complexity.
In an OFS, the selling shareholders announce their intent to sell a certain number of shares over a specified period, usually a single trading day. The shares are then offered to investors at a price determined by market demand. This method allows for a quick and efficient transfer of shares without the need for extensive documentation or prolonged subscription periods. The proceeds from the sale go directly to the selling shareholders rather than the company itself. For investors, an OFS can be an attractive opportunity to purchase shares of established companies, often at a discount to the prevailing market price.
IPOs, FPOs and OFS represent three distinct methods for companies to raise money on the stock market. IPOs mark a company's debut, allowing them to offer for sale new shares to the public for the first time on a stock exchange. This fresh injection of capital serves as the lifeblood for the company's growth, expansion, or debt repayment plans.
Speaking about “What is a follow-on public offer (FPO)”, these are tools that cater to companies already comfortably listed on the exchange. They function as a tool to raise additional capital through the issuance of new shares to both existing investors and the general public. The company can then utilize these funds for various strategic endeavors, such as further expansion to capture new markets, settling outstanding debts, or even acquiring other companies to solidify their market position.
Now, OFS (Offer for Sale) deviates from the pack. Here, existing shareholders, like promoters who might have been instrumental in the company's initial journey, or institutional investors who hold a significant stake, decide to sell their existing shares directly to the public through the stock exchange. The crucial distinction is that the company itself does not raise any fresh capital through an OFS. The proceeds from the sale go directly to the selling shareholders, potentially allowing them to partially or fully exit their investment in the company.
The main difference between IPO vs OFS and OFS vs FPO boils down to who is issuing the shares and the underlying purpose. IPOs cater to new companies seeking initial capital to kickstart their operations. FPOs empower already listed companies to raise additional funds for strategic growth. Finally, OFS provides a platform for existing shareholders to offload a portion of their holdings and potentially cash out on their investment.
Advantages of FPO:
Invest in a Growing Company: FPOs can be an opportunity to invest in a company with a proven track record and growth potential.
Enhanced Liquidity: An FPO can increase the company's shares outstanding, potentially improving the stock's liquidity and trading activity.
Credibility Signal: A successful FPO can be seen as a positive signal by investors, indicating confidence in the company's future.
Disadvantages of FPO:
Dilution of Existing Shares: Issuing new shares can dilute the ownership stake and potentially decrease the earnings per share of existing shareholders.
Price Impact: A large FPO can lead to a temporary dip in the stock price as more shares become available.
Limited Information: When comparing FPO and IPO, FPO prospectuses might have less detailed information about the company's future plans.
Advantages of OFS:
Invest in Established Companies: OFS allows you to invest in companies with a history of good performance.
Faster Investment Opportunity: The OFS process is typically quicker than FPO and IPO.
Potential for Lower Costs: Investment costs associated with OFS can be lower compared to those of IPO investment due to the streamlined process.
Disadvantages of OFS:
Limited Growth Potential: The reason for the share sale by existing investors might indicate a lack of confidence in the company's future growth.
Uncertain Impact on Stock Price: The impact of an OFS on the stock price can be unpredictable and depend on various factors.
Limited Liquidity: OFS might not significantly improve a company's share liquidity, especially if the selling shareholders are institutional investors.
Comparing IPO vs OFS and OFS vs FPO is essential for companies to decide on the most prudent and investor-friendly way to raise funds in the stock market:
IPO: Suitable for companies seeking to raise significant capital for initial growth and expansion.
FPO: Ideal for companies already listed on the exchange that require additional capital for specific purposes.
OFS: Useful for existing shareholders looking to offload a portion of their holdings or promoters looking for a partial exit.
Research the Company
Regardless of the method (IPO vs FPO vs OFS), you must thoroughly research the company's financials, future plans, and management.
Understand the Offering Details
You should carefully analyze the prospectus or offer document to understand the number of shares offered, price range, and purpose of the offering.
Choose a Broker
You should select a reputable broker who provides access to the specific IPO investment, FPO, or OFS you're interested in.
Submit Your Bid
During the subscription period, you should submit your bid for the desired number of shares according to the process outlined by your broker.
In order to become a successful trader, it is crucial for you to understand the key differences between IPO and FPO and OFS for making informed investment decisions. By carefully considering the purpose of each method, the company's profile, and their own investment goals, it will be possible for you to identify suitable opportunities within the stock market.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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IPOs raise initial capital for a company's growth and expansion. FPOs raise additional capital for an already listed company. OFS allows existing shareholders to sell their existing shares.
Existing investors and the general public can participate in an FPO.
IPO issues new shares for a new company. FPO issues new shares for an already listed company.
In an IPO, a company issues new shares to raise fresh capital. In an OFS, existing shareholders sell their existing shares, with no new capital raised by the company.
The impact of an OFS on share price can vary. A large OFS might lead to a temporary dip, while high demand from new investors could increase the price.
There are two types: dilutive (where new shares are added) and non-dilutive (where existing private shares are sold publicly).
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