Ravit is a budding entrepreneur and wishes to expand his company. However, to meet the financial requirements, he does not want to depend on loans. So, after thinking for a while, he thought of giving IPOs a try. But his friend Gauhar suggested that he should choose OFS. Confused between the two, he compared IPO vs OFS.
If you are also looking for the difference between the two, then we have got you covered.
When the companies want to raise capital for expanding their business, clearing their debts, purchasing any new machinery, or just covering their operational costs, they bring their shares to the general public.
This has, over time, also gained popularity amongst the investors. So let us compare IPO and OFS in detail now!
What is the Difference between IPO and OFS?
Initial Public Offering or IPO is a process by which an unlisted company gets listed in the stock market. The company makes the shares public for different investors. Their motive behind this is usually raising capital for various reasons. On top of that, going public also increases the visibility of the company.
On the other hand, offer for Sale or OFS is raising capital by the transfer of shares from one shareholder to the next in the primary market. This means that the existing shareholder liquidates the stocks, and therefore there is no fresh capital generated in this case.
Now you might have seen that some companies often combine OFS and IPO when they intend to sell their shares in the secondary market. Using this method, the existing shareholders can leave the ownership, and the company can approve the partial exit.
Let us now compare IPO vs OFS and look at some significant differences.
1. Basic Rules
IPO is when the shares of a company are going public for the investors for the first time. Whereas in an OFS, the investors can purchase the shares directly from the shareholders who are willing to sell off their shares.
IPO is generally open for a few days, usually, 3-5 days, so that investors can try their luck and bid for the IPO. At the same time, OFS is open for only a day.
Also, the promoters who are willing to sell the shares have to inform the stock exchanges about it. The ideal time to do this is 2 days before the announcement of the OFS.
OFS is also a choice only for the companies that are among the top 200 companies with respect to market capitalization.
SEBI also made it mandatory to reserve 25% of the shares for mutual funds and insurance companies. Other than that 10% should be reserved for the retail investors.
IPOs are usually bought in by companies looking for capital and visibility in the market. Whenever a company goes public, it gains a better reach amongst the public. IPOs are great for small companies or companies in their beginning phase.
OFS is the liquidating of one shareholder’s share to get a new one. This can be done by companies who already have some visibility, and their motive is different from that of IPOs.
3. Shares allotment
When an IPO is announced, it comes with a fixed price band. This means that the investors are allowed to bid in that range only. After the completion of the bidding process, the shares are allotted to the shareholders at a special price in the bid range.
When it comes to OFS, all the promoters decide a base price for the bidding. The investors are then required to bid for the OFS. Once the process is completed, the shares are either given to the shareholders at a single price (single clearing price) or at individual prices (multiple clearing prices). It totally depends on the OFS.
Since OFS is just passing on the shareholding from one shareholder to the next, it does not require a lot of money. There is no advertisement like the one involved in IPOs. All that is needed for an OFS is two days prior notice to the stock exchanges.
In IPOs, the company intends to come out to the public for the first time, and therefore there is a lot of costs required to spread the word. The newer the company, the more it will have to spend to advertise and inform the IPO’s people.
IPO Vs OFS
Open for 3-5 days
It stays open for one day
10% or 35% is reserved for retail investors
25% is reserved for insurance and mutual fund companies. 10% for retail traders.
The purpose is to gain capital and visibility in the market.
OFS intends to liquidate the shares of the current shareholders and pass it on to the new ones.
Shares are allotted at a single decided price.
Depending on the subscription, the shares can be allotted at a single price or at individual prices.
Money is required for promotions and awareness.
The cost in OFS is minimal.
IPO vs OFS is not that difficult to understand if you look at the differences clearly.
To sum it up, IPO is when the companies bring their shares out to the public for the very first time. OFS on the other hand is just passing on the shares of an existing shareholder to the next.
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