Difference between FPO and OFS

Key Difference: FPO (Follow-on Public Offering) or OFS (Offer for Sale) are not exactly the same, but they serve the same purpose. Both are methods to raise money by selling of additional shares that were owned by the majority shareholders or owners.

Market jargons are often confusing for many people who have not invested a lot of time to understand how the share markets work. So, what do IPO, FPO, OFS and other such words mean?

Everyone has heard about IPO or Initial Public Offering, with a lot of companies these days going public. IPO essentially means that in an attempt to raise capital, the company is listing the company on the share market. The company will issue shares and sell them to investors, who will then own a certain amount of the company. The number of shares are previously decided by the company, when it applies for listing itself on the stock market.

Now that the company is listed does not mean that its financial troubles will end. Even in the future, the company might require more funds for other means such as investment or new product, expansion, etc. So, what can it do in this case if it doesn’t want to take a huge loan?

The answer is usually an FPO (Follow-on Public Offering) or OFS (Offer for Sale). Now, these two terms are not exactly the same but they serve the same purpose. Both are methods to raise money by selling of additional shares that were owned by the majority shareholders or owners. FPO and OFS can be considered as two different methods that achieve the same aim – raising capital.

FPO is usually issued after the company has already been listed on the stock market. This is done to raise additional funds. There are usually two types of FPO – dilutive and non-dilutive. In dilutive, the board of directors come together and decide to raise the share float by creating new shares. This dilutes the earnings per share, hence the name dilutive. In non-dilutive, the company sells privately held shares that belong to the directors or other such insiders. They usually sell a small chunk of their shares, in order to raise more capital.

In OFS, the company sells off shares that are owned by the promoters or directors of the company. According to the NSE website, “Offer For Sale (OFS) mechanism has been introduced to facilitate promoters to dilute/offload their holding in listed companies. A separate window is being provided by the Exchange for the same.”

In OFS, the company usually determines a floor price – and the bids are usually placed for that price or higher. For FPO, the company usually gives a price band within which the bids should be place, can be no higher or lower than the said amount.

FPO usually has a lengthy process that requires the company to issue a prospectus, file the said prospectus with the SEBI or similar governing body and then hire managers who will take care of the sale. In OFS, the companies do not have to do any such thing.

FPO also usually last longer, somewhere between 3-5 days, while OFS last one trading day. For these reasons, OFS is proving to take a lead as the most used method for raising finances.

Comparison between FPO and OFS:

 

FPO

OFS

Full Form

Follow-on Public Offering

Offer for Sale

Objective

To raise money by selling of shares owned by shareholders

To raise money by selling of shares owned by shareholders

Time

3-5 days

Single trading session

Price

The company defines a price band , within which the bids should be placed

The company decides a floor price below which bids will be rejected

Application

Application is made by investors in advance

Bids can be placed on the day of the sale

Multiple bids

Investors cannot place multiple bids

Shares are sold in bundles, which means the seller must bid for bundles, rather than single shares

Prospectus

Requires the company to issue a prospectus and obtain approvals from SEBI before the shares will be issued

Does not require any formal paperwork or file a prospectus.

Charges

SEBI filing fees and hiring manager charges

STT and brokerage charges

Payment

Is made through the ASBA facility, so full payment is only done after the allotment of shares

Payment is done upfront when the bid is placed, the money is returned after the allotment is done and the buyer has not be allotted.

Image Courtesy: buzzkenya.com

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