Suppose, you wish to expand your company's capital, and you are not getting enough equity investment from the private investors. You do not wish to take a loan from the bank or any other person.
Then what is the other option left for you to expand your capital without taking loans?
Well, here comes the Initial Public Offer (IPO), Follow Public Offer(FPO), and Offer For Sale (OFS) for you, but what exactly are these?
How can one compare IPO vs. OFS and understand their difference?
Initial Public Offering (IPO)
IPO expands to Initial Public offering/giving. It's a method by which a private control company becomes a publicly-traded company by giving its shares to the general public for the first time to raise the fresh capital. A non-public company that includes a few shareholders shares its possession by going public by commercializing its shares.
Through commercialism, the company gets its name listed on the stock exchange market. It means interested investors can purchase the company's shares through the stock exchange market and will become a shareholder in the company.
Follow on Public Offer (FPO)
Follow on Public Offer (FPO) is a process by which a listed company on the stock exchange platform can raise capital by offering new shares to the investors or the existing shareholders.
FPO is used by companies to diversify their equity base.
Let's understand this by a simple example. Suppose, you have already raised fresh capital through an IPO, and you wish to raise some more. In this situation, you can issue new shares to the investors or to your existing shareholders to raise your capital.
However, this time you do not need to list your company as it is already listed on the stock exchange platform through IPO and this is the function of FPO as your capital has been expanded or diversified without undergoing the process of getting listed again due to the previous IPO.
The only difference between FPO and IPO is that an FPO is brought out by a company that is already listed.
Another similar concept that often sparks confusion is the offer for sale.
Offer For Sale (OFS)
An OFS is different from IPO and FPO because Offer For Sale does not raise any fresh capital. In this case, an existing shareholder dilutes their stakes through the primary market.
An OFS solely ends up in a transfer of ownership from one shareowner to a different one and doesn't increase the share capital of the corporate.
Some corporations mix their initial public offering (IPO) with OFS to provide a partial exit to promoters and non-public equity (PE) investors.
IPO Vs OFS: How are these concepts different from each other?
Here are some of the most distinguishing features of IPO, FPO, and OFS based on prominent factors:
1. Rules and Regulations
Offer For Sale is only valid for the top 200 companies based on their market capitalization. Non-promoter shareholders with more than 10 percent of the share are also eligible to sell their shares.
According to the SEBI's guidelines, 25 percent of the shares in OFS should be reserved for the insurance companies and mutual funds, and 10 percent of shares must be reserved for retailers.
Before issuing a notice for OFS, promoters need to inform the stock exchange platforms two days before announcing it.
An Initial Public Offer (IPO) is valid for 3-10 days to purchase shares, where 35 percent of the shares are reserved for the retail investors, and the maximum amount a retail investor can spend is 2 lakh rupees.
A Follow on Public Offer (FPO) bidding goes for 3 - 5 days for all the listed companies. Investors can place their bids through the ASBA portal through internet banking or apply online through bank branches, and shares are allotted based on the cut-off the price after the book-building process. You can get shares at a lower price than the market price.
2. Procedurally different
IPOs are mostly used by companies that require visibility in the listing on stock exchange platforms. Mostly small companies utilize the use of IPOs much more openly and frequently as compared to well-renowned companies.
This happens because most of the small companies are still at the initial stages of growth and require the attention of investors for their growth.
We already know that companies who sanction an IPO are a great gateway for investors to buy shares, so an IPO works as an advantage for small businesses that have the potential to grow shortly.
Whereas, FPO and OFS are utilized by companies that are already listed on stock exchange platforms. Mostly, small companies that would have applied for IPO in its initial stages utilize their already listed status further by using an FPO after attaining a good name for itself.
The keyword 'after' is used as small companies do apply for FPO and OFS when they have gained a good name for themselves; however, it is much easier and less hazardous for a company with a good reputation to do this.
The cost incurred by the promoter and investor within the company throughout an OFS resembles a token economy. The sole demand is for the corporation to possess the exchanges up to 2 days beforehand. The capitalist, during this case, incurs solely the regular dealings charges.
An Initial Public Offering (IPO) is preceded by a lot of promotional material activities to induce the word out. The more obscure the corporate is, the larger tough it'll face and, hence, are going to be needed to pay a great deal quite before at this stage. The appointment of an associate degree underwriter and different SEBI formalities adds to the expenses during this case additionally.
Whereas whenever a company issues an FPO and sets a base price, the investors need to fulfil and meet this base price to buy the shares which the company has issued an FPO for. After these shares are bought (at the price that was decided and agreed by the company and the buyer), this money is not instantly cut from their credit. Instead, the money is deducted only and only when everything has been finalized through an online portal which, in terms of finance, is called an ASBA (Application Supported By Blocked Amount; ASBA is an alternative mode of payment in which the application's money of the investors does not deduct until his allotment of shares is finalized)
However, before all these shares are bought, they have to be promoted to get the attention of investors without letting the issue of an FPO go to waste. This further means that the company has to spend a little money on the promotional material for their sales within the market.
4. Allotments of the Shares
Before the commencement of the OFS, the promoters within a company discuss a fair price for the shares that becomes the threshold mark (or the baseline) mark that needs to be paid. This price or the baseline mark is always less than the market price. To understand this, one can take the example of how small businesses in a market sell the same product as larger companies, but at a more reasonable price, which they know will be preferred by the customers much more.
After this base price has been decided, the buyers or the investors are expected to bid prices above the base price as an investment. And if an investor wins the bid, they win the allocated bidding share that they have won (since there is no limit upon the number of shares that can be bought within the OFS), and the investor can walk away with even one share if that is what they wish to settle for.
Now, these shares follow two routes; either all the investors receive the shares of the same cost (single value clearing), or they all receive shares at different values, where values are decided on individual preferences (multiple clearing costs).
In an initial public offer (IPO), the value band (the base price) here is set by the investment bank before the initial offering. This can be understood by the example of the 'YES' bank where, when they launched the FPO to raise 15 thousand crores, they changed their initial price of twelve rupees to thirteen rupees per share.
To the naked eye, the difference of one rupee doesn't hold any value, but in the market of finance, every penny counts. The bank initiated this change and made it exclusive to only the works of the bank under the worker reservation portions.
To sum up everything, an IPO is a method through which a private company makes its shares public to the investors through a stock exchange platform to raise fresh capital.
An FPO is used when an already listed company (that means a company that is listed on the stock exchange platform) wants to expand its capital and diversify their shares.
And lastly, an OFS is a method through which a promoter (an individual who is mostly the founder of the company) wants to reduce their holding shares (that means this person requires money, so he/she wants to reduce his stakes within the company).
For more information on IPO vs OFS, you refer to this video on Youtube.
All these methods make sure that there is a continuous expansion that a small or big company can utilize in whatever way they wish to.
Keeping this in mind, these methods have their advantages and disadvantages at every front. It is the company or the individual within the company who must decide which method is the most suitable for their needs and would benefit them all as a whole.