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Learn the key differences between IPO and Offer For Sale (OFS) in stock market offerings.
IPOs and OFS are two key stock market offerings, each serving different purposes. While an IPO raises fresh capital for a company by issuing new shares, an OFS involves the sale of existing shares by current shareholders. Understanding the differences helps investors make informed decisions and choose the right offering for their strategy.
An Initial Public Offering (IPO) refers to the process by which a private company offers its shares to the public for the first time, allowing it to raise capital from external investors. This is a significant step for any company, as it transitions from being privately owned to publicly traded on a stock exchange.
An IPO allows companies to issue fresh shares to the public or existing shareholders to sell their stakes. The funds raised from the sale of these shares are typically used for expansion, paying off debt, or investing in other business initiatives. When a company goes public, it hires investment banks to underwrite the IPO, ensuring the offering reaches the right market segment.
An Offer For Sale (OFS) is a mechanism through which existing shareholders, such as promoters or institutional investors, sell their shares to the public on the stock exchange. Unlike an IPO, where fresh shares are issued to raise capital for the company, an OFS involves no fresh capital for the company itself. Instead, it simply provides an opportunity for existing shareholders to reduce their stakes.
The OFS process is typically conducted through a stock exchange, where the shares are offered to the public for a specified period. Unlike an IPO, the price of shares in an OFS is typically determined through a fixed price or a bidding process. The proceeds from the sale of shares go directly to the sellers, not the company.
Refer the table below:-
| Factor | IPO (Initial Public Offering) | OFS (Offer for Sale) |
|---|---|---|
Capital Raising |
Company raises fresh capital by issuing new shares |
Existing shareholders sell shares; proceeds go to them |
Purpose |
Raise funds for business needs and list the company publicly |
Allow shareholders to reduce stake or meet regulatory norms |
Share Issuance |
New shares are created and offered to the public |
No new shares; existing shares are sold |
Impact on Ownership |
Dilution of existing ownership due to increased share count |
No dilution; ownership simply transfers between investors |
Recipients of Funds |
Company receives the funds |
Selling shareholders receive the funds |
The following are the advantages of an IPO and an OFS:
Raising Capital: The company can raise substantial funds for expansion and development.
Increased Visibility: Going public increases the company’s visibility and credibility in the market.
Exit Opportunity: IPOs offer early investors an opportunity to exit with profits.
Liquidity for Shareholders: OFS provides liquidity for large shareholders, such as promoters or institutional investors, who want to reduce their holdings.
Reduced Shareholding: Companies can reduce the concentration of shares held by a few individuals and enhance the market's free float.
No Dilution of Control: Since no new shares are issued, the ownership structure remains intact.
IPOs raise fresh capital for companies, while OFS provides liquidity to existing shareholders. Understanding these differences allows investors to assess risks and rewards, tailoring their strategies to their preferences and risk tolerance.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Reviewer
An IPO involves issuing new shares to raise capital for the company, while an OFS involves the sale of existing shares by shareholders.
Both IPOs and OFS can affect stock prices, with IPOs generally diluting the shareholding structure, while OFS usually has little impact on the company’s market value.
To invest in an IPO or OFS, individuals need a valid demat account, a PAN, and sufficient funds in a linked bank account.
An IPO helps companies raise fresh capital for growth or debt repayment, altering the capital structure. In contrast, an OFS enables existing shareholders to sell shares, offering liquidity without raising funds for the company.
OFS in an IPO refers to Offer for Sale, a component where existing shareholders or promoters sell their shares to the public during the initial offering. Introduced by SEBI in 2012, it helps listed or listing companies meet minimum public shareholding norms without issuing new shares, allowing direct trading on exchanges like NSE or BSE.
Investment in an OFS is taxed as capital gains upon sale, similar to listed shares. Short-term gains (held less than 12 months) are taxed at 15%, while long-term capital gains (held over 12 months) exceeding ₹1 Lakh are taxed at 10%, as per the Income Tax Act. Securities Transaction Tax (STT) also applies.
Investment in an IPO is taxed as capital gains on sale. Short-term gains (held under 12 months) are taxed at 15%, and long-term gains (held over 12 months) above ₹1 lakh are taxed at 10%, with no tax at purchase. STT applies.
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