IPO vs OFS: Key Differences in the Stock Market

An Initial Public Offering (IPO) refers to the first issuance of equity shares by an unlisted company to the public, resulting in the company becoming listed on a recognised stock exchange. Shares offered through an IPO are newly issued, and the proceeds are received by the company.

The IPO framework includes regulatory filings, disclosure through a draft red herring prospectus, price discovery mechanisms, and allotment of shares through an exchange-enabled bidding process.

An Offer for Sale (OFS) is a mechanism through which existing shareholders of a listed company offer their shares for sale via the stock exchange platform. When compared with an IPO, the key distinction is that an OFS involves the sale of existing shares and does not result in issuance of new equity by the company.

The OFS framework, as prescribed by SEBI, is primarily used for stake dilution in listed companies and operates through a time-bound, exchange-based bidding window.

Within the Indian equity market framework, IPOs and OFSs are two distinct routes through which shares reach public investors and form part of IPOs and Regular Stock Investments. While both result in public shareholding, they differ in issuance structure, regulatory treatment, execution process, and the movement of funds.

An IPO involves the issuance of new equity shares by an unlisted company, leading to an increase in share capital and public ownership. An OFS, in contrast, is a secondary market mechanism that allows existing shareholders of a listed company to sell shares without changing the company’s share capital. These structural differences influence disclosure requirements, pricing methods, and transaction execution.

IPOs and OFSs are governed by separate SEBI regulations and procedural timelines. Comparing the two helps clarify how regulatory oversight, allocation methods, and market access differ between primary issuance and secondary share transfers, without implying suitability or preference for any investor category.

Advantages (Structural Characteristics)

• Enables a company to raise capital through the issuance of new equity shares to the public.
  

• Results in the company becoming listed on recognised stock exchanges, subject to regulatory approval.
  

• Requires detailed disclosures through offer documents filed with the securities regulator.
  

• Establishes a market-determined price for the company’s shares through defined price discovery mechanisms.
  

• Leads to ongoing compliance obligations, including periodic disclosures and corporate governance requirements.
   

Disadvantages (Structural Constraints)

• Involves an extensive regulatory process, including approvals, disclosures, and compliance checks.
  

• Requires adherence to listing regulations, which continue after the shares are listed.
  

• Entails costs related to issue management, underwriting, legal review, and regulatory filings.
  

• Subjects the company to market-based price fluctuations after listing.
  

• Imposes restrictions such as lock-in requirements for certain shareholder categories, as prescribed by regulations.

Advantages of OFS

• Enables existing shareholders, such as promoters or institutional investors, to divest equity in a listed company through a stock exchange–based mechanism.
  

• Does not involve issuance of new shares, ensuring that the company’s existing share capital structure remains unchanged.
  

• Operates within a defined and time-bound framework, as the offer is conducted during market hours and typically concluded within a single trading day.
  

• Provides transparency in bidding, as bids are placed through the exchange platform and are visible during the offer window, subject to applicable rules.
  

• Supports compliance with minimum public shareholding requirements prescribed under securities regulations.
   

Disadvantages of OFS

• Does not result in capital inflow to the company, as proceeds are received by the selling shareholders rather than the issuer.
  

• Participation is restricted to listed companies that meet eligibility criteria prescribed by the securities regulator.
  

• Allocation is determined through a price-priority mechanism, which may result in partial or no allotment depending on bid levels and category-wise demand.
  

• The offer size and pricing parameters are defined by the selling shareholders, limiting flexibility once the offer window opens.
  

• Retail participation is subject to reservation limits and bidding conditions specified under the OFS framework.

The IPO process follows a defined regulatory sequence that includes appointment of intermediaries, submission of disclosure documents to SEBI, price discovery through book-building or fixed-price mechanisms, and allotment of shares followed by listing on stock exchanges.

Each stage of the process is governed by disclosure, eligibility, and compliance requirements prescribed under SEBI regulations.

The OFS process is conducted through the stock exchange mechanism and follows a predefined regulatory framework. Details of the offer, including timing and pricing parameters, are disclosed through exchange notifications.

Bids are placed during the OFS window and allocations are determined based on price priority and category-wise rules. Settlement is completed through the clearing corporation as per the applicable settlement cycle.

Participation in an Initial Public Offering (IPO) follows a standardised process defined by market infrastructure institutions and regulations. The steps below describe the typical procedural flow, which may vary depending on intermediary systems and regulatory requirements.

• Availability of offer details
  Details of the IPO, including issue size, price band, offer period, and risk disclosures, are published through statutory filings and exchange notifications.
  

• Opening of the issue for subscription
  The IPO opens for subscription during a defined window, during which bids are accepted from eligible investor categories as per issue terms.
  

• Submission of bids through supported mechanisms
  Applications are submitted using approved mechanisms such as the Application Supported by Blocked Amount (ASBA) process, where funds remain blocked in the applicant’s bank account until allotment.
  

• Price discovery and bid evaluation
  In book-built issues, bids received at various price levels are aggregated to determine the final issue price in accordance with prescribed rules.
  

• Allotment of shares
  Share allotment is carried out based on subscription levels, category-wise allocation norms, and regulatory guidelines. Oversubscribed issues follow proportionate or lottery-based allocation methods, as applicable.
  

• Unblocking of funds and credit of securities
  Funds are unblocked for unsuccessful or partially successful bids, and allotted shares are credited to the applicant’s demat account.
  

• Listing on stock exchanges
  After completion of allotment and regulatory formalities, the shares are listed on recognised stock exchanges and become available for trading.

• Participation in an Offer for Sale (OFS) takes place through the stock exchange mechanism, using a demat and trading account linked to a recognised exchange.
  

• OFS details, including the offer date, floor price (if specified), and investor category allocations, are announced by the selling shareholder through stock exchange notifications prior to the offer.
  

• Bids are placed during market hours on the designated OFS trading window, quoting the number of shares and bid price at or above the declared floor price, where applicable.
  

• Investor categories, such as institutional, non-institutional, and retail, are identified at the time of bidding, and allocations are determined in accordance with SEBI-prescribed rules for category-wise reservation.
  

• Share allocation is finalised after the close of the bidding window, based on price priority and category eligibility, as defined under the OFS framework.
  

• Successful bids result in the transfer of shares to the buyer’s demat account, with settlement carried out through the clearing corporation as per the prevailing settlement cycle of the stock exchange.

Both IPOs and OFSs are regulated by SEBI under separate frameworks that govern disclosures, eligibility, allocation, and settlement.

For IPOs

• Submission of a draft red herring prospectus is required

• Regulatory review and observations by SEBI apply

• Lock-in provisions are applicable to specified shareholders
   

For OFSs

• A detailed prospectus is not required; disclosures are made through exchange filings

• Category-wise allocation norms apply, including prescribed reservations

• The OFS framework is available only for listed companies

In an OFS vs IPO context, the two mechanisms differ in how shares are made available to the market. IPOs introduce new shares through primary issuance, while OFSs redistribute existing shareholding through secondary market mechanisms.

Pricing in IPOs is determined through book-building or fixed-price methods, whereas OFSs operate with disclosed pricing parameters during the bidding window. Allocation methodologies also differ, with IPOs following allotment rules defined in issue documents and OFSs following price-priority and category-based allocation norms.

IPOs are used by unlisted companies to access public markets through primary issuance of equity shares.

OFS mechanisms are used by existing shareholders of listed companies for stake dilution, including cases related to regulatory shareholding requirements or disinvestment by public sector entities.

IPOs and OFSs represent distinct equity distribution mechanisms within the Indian stock market framework. An OFS IPO comparison highlights differences in share issuance, regulatory processes, and transaction structure. Understanding these distinctions provides context on how primary and secondary market transactions are conducted under SEBI regulations, without altering the underlying ownership or capital structure in the same manner.

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.