IPO vs FPO vs OFS : Difference between ipo vs fpo

In this blog, we will try to understand the terms IPO, FPO, and OFS. These terms are frequently used in connection with funds offered by the company. There are advantages and disadvantages of each offer made by the company. It is very important to gain knowledge about these terms.

When any company starts a business, promoters invest their money in the company and start the initial operations. After a few days, the company earns profit from its business.

If Promoters invest this profit again into the business, then it is called Internal-financing.

But if the requirement of finance is not fulfilled by internal financing. The company tries to procure finance from external sources called External Financing. The company requires finance for many reasons like an expansion of business, modification of equipment, Requirement of the new office, etc.

External finance can be raised in two ways.

1..Debt Financing: – By taking a loan for the company from a Bank, or private
institution.

2.. Equity Financing: – In this type, the company sells its equity shares and raises
funds.

In equity finance, there are two ways in which a company can raise funds. One is from selling their equity shares to Angel Investors, Venture capital firms, Private equity firms, and institutional investors.

There is another way of raising the funds for the company. This is by offering the company’s
share to the public by way of public issue. If the company offers shares to the public
for the first time it is called Initial Public Offer i.e. IPO. Once an IPO is issued, a privately owned company becomes a public limited company. There are advantages and disadvantages of becoming a public limited company. One of the main advantages is that the company gets access to required finance and can grow more rapidly. The company can Fulfil its expansion plans.

However, the company has to be more transparent in its operations. The company is answerable to its shareholders. Bringing the IPO is a landmark moment for the company. It adds value to its reputation.

At the time of issuing the IPO, the company has to file a Draft Red Herring Prospects with SEBI. This is a public document.

The company can come up with two types of IPO.

1.. Fixed Price Offering:- In this offer, the company offers its share at a fixed price. The investor has to apply for shares at a predetermined fixed price.

2.. Book Building Offering: The company determines the price of shares by the demand for shares. The company sets a price range for investors to submit bids. The company decides the final bid after considering different bids from customers.

In this process of IPO, the Underwriter plays a crucial role. Underwriters can be financial institutions, merchant bankers, or brokers who assist companies in the process of IPO.

The success of an IPO depends upon its subscription.

Undersubscribed IPO: – If public demand for shares is less than the available shares in the IPO, the IPO is undersubscribed. This shows the failure of the IPO. In this case, the Underwriter purchases the remaining shares and prevents IPO failure.

Oversubscribed IPO: – If public demand for shares is more than the offer share. It is said that IPO is oversubscribed and it is successful. It shows the reputation, faith, and popularity of the company among investors. It will establish a company in the stock market. This is a proud moment for the company.

If the IPO is oversubscribed, then shares are allotted
on a pro-rata basis or by way of lottery.

Listing Price Gain:-

It is the Listing Price Gain for which many investors invest in IPO. IPO’s success depends upon the listing price gain obtained by the investor. After the allotment
of shares in IPO. Share starts trading on the stock exchange. All investors can
sell and purchase the shares in the stock market. The listing price depends upon the demand and supply of shares in the stock market. If the listing price is more than the offer price in the IPO. IPO investors get the immediate listing gain. But if the listing price is
less than the offer price then IPO investors suffer loss.

Many investors invest in IPOs for listing price gain. They will sell off the shares immediately after listing. This strategy is called the flipping strategy.

FPO: – Follow on Public Offering

Those companies that are already listed on the stock exchange can raise more funds by issuing further offers to the public. This type of issue is called FPO (Follow on Public Offering). This is an additional source of fund raising for the company. The existing company requires the funds for the expansion of business, capital Debt reduction, etc.

The procedure for FPO is similar to IPO. The company has to appoint an Underwriter and issue a prospectus having information about their offer to the public. FPOs are of two types

1.. Dilutive FPO In this offer, the company issues additional shares in the market with increasing capital value. This will reduce Earnings per share of the company and in turn, it will reduce the share price of the company. This will reduce the value of existing shareholder’s investment.

2. Non-Dilutive FPO In Non-dilutive FPO, the promoters, board of directors, or large investors offer their privately held shares to the public. There is no increase in the total number of shares but more shares become available to the public. There is no change in Earning Per Share or share price of the company. There is no change in the value of existing share investors.

OFS:- (Offer for Sale)

This option is used by publicly traded companies to offer their shares to the general public.
Previously only promoters offered OFS but nowadays even private shareholders
who hold more than 10% of the share can participate in OFS.

Generally, the company offers the shares in OFS at a discounted price. Company and shareholders offer their intention to conduct OFS. They will offer the date and number of shares offered. There is a specific bidding period in which any potential investors can bid. The company sets the floor price which is generally less than the existing market price.
Nobody can bid below this floor price. After the bidding period is over the successful bidder gets the allotment of shares.

The minimum public holding for a public limited company is 25%. If any company does not
fulfill this requirement can use OFS to dilute promoter holding. Minimum 25% shares are reserved for mutual fund and insurance companies and 10% is reserved for retail investors.

Non-diluted FPO and OFS are similar. Only OFS has fewer formalities as compared to
FPO.

Conclusion:-

1. IPO:- In an IPO, a private company offers its equity shares to the general public and becomes a Public Limited company.

2. FPO:- In FPO, an already listed company, offers its equity shares to new or existing shareholders.

3. OFS:- In OFS, the company’s director, promoters or major shareholders offer their shares to the public.

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