Difference Between OFS (Offer for Sale) and FPO (Follow on Public Offer)

In the previous chapters, we covered how to invest in IPOs and learnt all about the IPO Grey market. Now, before investing in IPOs, we must quickly look at other ways of raising capital.  

This chapter will briefly compare an offer for sale (OFS), and a follow-up public offer (FPO) to an initial public offer (IPO). 

Let’s dive into the world of these share issuances, unravelling their processes, goals, and the unique characteristics that set them apart.

• Offer for Sale (OFS)

Interestingly, in an Offer for Sale, promoters can offer secondary shares to the entire market, including retail and non-retail investors, unlike a rights issue restricted to existing shareholders. 

The exchange provides a separate window through stockbrokers for the Offer for Sale. This allows a company to route funds through OFS only if promoters want to sell out their holdings or maintain minimum public shareholding requirements. 

During an Offer for Sale, the company sets a floor price, and retail and non-retail investors can bid. The shares are allotted if bids are at or above the cut-off price and are settled by the exchange into the investor's Demat account in T+1 days. One of the notable examples of an Offer for Sale is NTPC Limited, which offered a maximum of 46.35 million shares at a floor price of ₹168. The OFS was held on 29th August 2017 for non-retail investors and 30th August 2017 for retail investors and was fully subscribed within 2 days.

• Follow-on Public Offer (FPO)

Another option usually used by companies listed on the stock exchange to raise additional funds through the offering of stocks is FPO or Follow-On Public Offering. The process consists of attracting new funds for the company by issuing additional shares to the public. This is akin to an IPO but with a different method. 

While this difference in status may seem small, it is an important distinction that must be considered when analysing the differences between an FPO and a regular IPO. Unlike a regular IPO, where the company usually does not have any kind of established market presence before going public, with an FPO, investors are already familiar with the operations and financial performance of the company, thus eliminating some of their

In the event of an FPO, the company records a rights issue to investors and sells shares through an authorised process under SEBI (Securities and Exchange Board of India). The company calculates the value of its shares through the technique known as book-building, whereby investors place their bids to buy shares. All this is made possible by the Application Supported by Blocked Amount (ASBA) method. The shares are afterwards allocated following a cut-off price set by the company.

Nevertheless, FPOs are fading away these days as the growth in OFS approaches, and there is more bureaucratic scrutiny. OFS also refers to offering new stocks; companies that need to raise more capital prefer this option over having new shares since the existing ones can sell their stock in the marketplace.

Offer for Sale vs Follow Public Offering

Metrics	Offer for Sale (OFS)	Follow Public Offering (FPO)
Objective	To raise capital by selling shares owned by existing shareholders	To raise capital by selling shares owned by existing shareholders
Multiple Bids	Shares get sold in lots, meaning sellers bid for bundles, not single shares	Shares get sold in lots, meaning sellers bid for bundles, not single shares
Uses	Offload the shares of promoters	Fund new projects
Prospectus	Doesn’t need to file a prospectus or formal paperwork	Needs a formal prospectus and SEBI approval before issuing shares
Time Taken	Single trading session	3-5 days
Charges	Brokerage and STT charges are applied	Charges for hiring manager and filing with SEBI
Dilution	Shares can be diluted, leading to changes in the shareholding structure	No impact on the number of authorised shares
Price	The firm decides on a floor price, bids below this price are rejected	The firm decides on a price band, bids should be within this band
Who can use it?	Can be used by the top firms above ₹1,000 cr market capitalisation	All listed firms can use this process
Application	Bids can be placed on the day of the sale.	Investors must put in an application in advance
Payment	Payment is made upfront when bids are placed and refunded if no allotment	Payments made via the ASBA method and full payment after shares have been allotted

IPO vs OFS vs FPO:

Feature	IPO	OFS and FPO
Details for smaller firms	It can vary depending on market regulations and investment bank involvement, generally less detailed compared to established companies.	Not applicable
Purpose	Raise capital by issuing new shares and gain public access to equity markets, also increasing brand visibility.	Raise capital by selling existing shares held by promoters or investors.
Typical issuers	Various, including growth-oriented, established, and even pre-revenue companies.	Established and respected firms, often PSUs, but not limited to them.
Regulatory compliance	High, and requires prospectus and SEBI approval.	Medium to high, depending on the size and complexity of the offering.
Completion time	3-5 days, but can be longer for complex or large offerings.	Typically 1 day, but it can be extended for larger offerings.
Impact on EPS	No impact, as no new shares are issued.	FPO: Dilutive, as new shares are issued, increasing the denominator and potentially decreasing EPS. OFS: No impact, as existing shares are sold, leaving the total outstanding shares unchanged.

Conclusion

Establishing a smart and strategic hand in the world of IPO, OFS, and FPO can indeed be tough; however, this endeavour might be extremely profitable for investors. Every route has its own individual opportunities and challenges, so those could greatly mould the corporation's and holders’ financial situation. However, with the world of finance constantly changing, these share issuance methods are the current mode of doing business. They are a major source for investors to learn about which ideas are most popular in the industry.

Thus, if you are one of those people who admire the exuberance when news is issued on the market as it happens in an IPO or someone who prefers effectiveness by raising capital just like OfS does, or anyone interested more strategically wise to invest in FPO, understanding these types remains a super significant detail that makes all the difference. Armed with this, you’ll know how to strike out on your own in that evolving world of financial revenues.

In the next chapter, we see how to interpret a red herring prospectus (RHP) and some points of importance that one should be aware of while investing in an IPO.