Initial public offerings (IPOs) have become a trending topic in the stock market over the past few years. In fact, many investors opened a demat account just so that they could start investing in IPO. Some investors invest in IPOs solely for quick listing gains, while others see great potential in the many new businesses launching their IPO. However, if you were to study investing in IPOs, you would come across terms like FPO and OFS. The terms are closely related, and they are also used interchangeably sometimes. However, the terms differ, so let us understand each term separately, starting with an IPO.
IPO – Initial Public Offering
Entrepreneurs are always looking to grow their businesses. However, to expand operations, the company will need to raise capital through some means. That is because companies generally incur various costs while scaling up. For example, the process of scaling up requires funds to set up new offices, purchase new manufacturing equipment, produce new products, and expand the workforce. Coming out with an initial public offering in the primary markets is one of the most effective ways to raise funds.
An IPO is the first time a company issues its shares to retail investors, including the general public. So, by investing in an IPO, the general public can become investors in the company for the first time. It is also the means through which an unlisted company lists itself on stock exchanges like the NSE (National Stock Exchange) or BSE (Bombay Stock Exchange). Besides capital expansion, the funds raised through an IPO can also be used to pay off existing debts. Moreover, with the launch of an IPO, a company also increases its visibility, making it easier to raise or borrow funds in the future.
FPO – Follow-on Public Offer
A follow-on public offer or FPO is similar to an IPO as it is also a means of raising funds for capital expansion or operating expenses. However, in the case of an IPO, a company that launches an IPO is an unlisted entity. On the other hand, the company that is coming out with an FPO is already trading on the stock exchanges. So unlike an IPO, an FPO does not list the company on the stock exchanges.
A company’s growth cycle once it lists on the stock exchange. A company can continue to scale up if it can invest capital to grow its existing operations or explore new ventures. After getting listed on the exchanges, companies can still borrow debt and raise equity. In the case of the latter, it can come out with an FPO. The FPO launch resulted in the expansion of shareholder’s base and a dilution of earnings per share (EPS).
OFS – Offer For Sale
An offer for sale is abbreviated as OFS, which is a three-letter abbreviation similar to an IPO and FPO. However, investing in an OFS differs from investing in IPO or FPOs. Unlike an IPO or FPO, an OFS is not an issue of fresh equity to raise funds. Instead, an OFS leads to a transfer of ownership of shares from one shareholder to another. Therefore, an OFS results in no dilution of stake. So an OFS simply means that an existing shareholder, mainly the promoters of the company or private equity funds (PE funds), are putting the shares they hold up for sale in the primary market.
So an OFS provides an exit route to the existing promoters and PE funds invested in the company. However, that does not mean an OFS should always be perceived negatively. Promoters may want to reduce their stake for non-business-related reasons. And a PE fund, by nature, sells its stake to find new investment opportunities. The government is also reducing its stake in many public sector companies through OFS. Moreover, many companies often offer an IPO with an OFS, raising fresh equity and letting promoters and PE funds sell their stake partially.
To sum up, the primary difference between an IPO and FPO is that an unlisted company comes out with an IPO, while listed companies opt for FPOs. In comparison, an OFS differs from an IPO and FPO, as it does not result in the creation of fresh equity. Hence, there is no dilution of the earnings per share in the case of an OFS.
A company coming up with its IPO, OFS, or FPO will announce the subscription dates and the price bands. Investors interested in investing in an IPO or participating in the FPO or OFS can then bid using their trading account.