Introduction
With terminology like IPO, FPO, and OFS emerging regularly, stock market investing might be intimidating. Although these are several methods used by businesses to raise money, their goals and effects differ greatly. Making wise financial selections requires an understanding of these distinctions. The procedures, benefits, hazards, and salient distinctions between IPOs, FPOs, and OFS will all be covered in this handbook.
What is an IPO (Initial Public Offering)?
The first time a private company makes its shares available to the public so that it can be listed on a stock exchange is known as an initial public offering, or IPO.
IPO Process: How it Works
- The business engages an investment bank and makes the decision to go public.
- For approval, a Draft Red Herring Prospectus (DRHP) is sent to SEBI.
- The business initiates the subscription period and determines the offer price.
- when being allocated, shares are listed on the stock exchange when investors place bids for them.
Why Companies Launch IPOs
- To raise capital for expansion and new projects.
- To pay off debt and improve financial stability.
- To provide an exit for early investors and venture capitalists.
Example: Zomato IPO (2021)
Zomato, India’s food delivery giant, raised ₹9,375 crore through its IPO. Despite initial fluctuations, it became a key player in the stock market, attracting retail and institutional investors alike.
Data Point: IPO Returns
According to a recent financial study, the average first-day return on IPOs in 2023 was 18.4%, showing significant investor interest.
What is an FPO (Follow-on Public Offering)?
A Follow-on Public Offering (FPO) occurs when a company that is already listed on the stock exchange issues additional shares.
Types of FPOs
- Dilutive FPO: The company issues new shares, increasing the total share count and potentially diluting existing ownership.
- Non-Dilutive FPO: Existing shareholders sell their shares without increasing the total share count.
Reasons for an FPOWhy Companies Launch FPOs
- To raise capital for business expansion or acquisitions.
- To reduce debt burden and improve financial health.
- To improve public shareholding and market liquidity.
Reliance Industries FPO Case Study
Through an FPO, Reliance Industries obtained money to finance its foray into the retail and digital industries, which resulted in significant development.
Professional Perspective
For investors, an FPO can have both positive and negative effects. Although it offers expansion capital, returns may be impacted by share dilution. – Bloomberg Market Analyst
What is an OFS (Offer for Sale)?
An Offer for Sale (OFS) allows promoters and major shareholders to sell their existing shares to the public without raising fresh capital for the company.
OFS vs. IPO/FPO
| Feature | IPO | FPO | OFS |
|---|---|---|---|
| Who issues shares? | Company | Company | Existing shareholders |
| Capital raised? | Yes | Yes | No |
| Share dilution? | Yes | Sometimes | No |
| Who benefits? | Company | Company | Selling shareholders |
Benefits of OFS
- Enables promoters to lower their investment without a difficult procedure.
- Quicker procedure than an FPO or IPO.
- Because shares are frequently provided at a discount, it encourages retail involvement.
Example: Government of India’s OFS
The Indian government used OFS to divest its stake in ONGC and Coal India, generating billions in revenue.
Practical Takeaway:
Verify whether the company or current shareholders stand to gain before investing in an OFS.
Key Differences: IPO vs. FPO vs. OFS
| Feature | IPO | FPO | OFS |
|---|---|---|---|
| Objective | Raise capital for growth | Raise additional funds | Reduce stake of promoters |
| Beneficiary | Company | Company | Selling shareholders |
| Share Dilution | Yes | Yes (if dilutive) | No |
| Who Can Invest? | Retail & Institutional | Retail & Institutional | Institutional & Retail (limited allocation) |
Investor Considerations and Risks
- Dilutive FPO: The company issues new shares, increasing the total share count and potentially diluting existing ownership.
- Non-Dilutive FPO: Existing shareholders sell their shares without increasing the total share count.
IPO Risks
- High volatility due to speculative demand.
- Lack of historical financial data to assess performance.
FPO Risks
- Dilution risk, leading to lower earnings per share.
- Negative market perception if seen as a desperate move to raise funds.
OFS Risks
- If promoters sell large stakes, it could indicate lack of confidence in the company’s future.
- Less opportunity for retail investors as institutional buyers often get preference.
Which is better: IPO, FPO, or OFS?
It depends on your investment goal:
- IPO: Best for early investment in a high-growth company.
- FPO: Suitable for investing in an established company raising funds.
- OFS: Good for acquiring shares of a company at a discount.
FAQs: People Also Ask
What is the difference between IPO, FPO, and OFS?
An IPO is when a company sells shares to the public for the first time. An FPO is when an already-listed company issues more shares. An OFS is when existing shareholders sell their shares without issuing new ones.
Which is better: IPO, FPO, or OFS?
It depends on your investment goal:
- IPO: Best for early investment in a high-growth company.
- FPO: Suitable for investing in an established company raising funds.
- OFS: Good for acquiring shares of a company at a discount.
Does OFS dilute shareholding?
No, an OFS does not dilute shareholding because it only involves the transfer of existing shares from promoters to new investors.
How does an FPO affect share price?
A dilutive FPO can decrease share price due to an increase in total shares, while a non-dilutive FPO has no such impact.
Conclusion
Making wise investing decisions requires an understanding of IPO, FPO, and OFS. FPOs assist listed firms in raising extra funds, OFS allows promoters to lower their ownership, and IPOs allow private companies to raise capital for the first time. Investors must thoroughly investigate each before making an investment because they each have different risks and rewards.
Final Takeaway:
Before taking part in an IPO, FPO, or OFS, the company’s fundamentals, the offering’s goal, and the state of the market should always be examined. Making educated judgments is the first step in smart investing!