What is OFS in IPO: Understand the Difference, OFS Vs IPO

There are two types of Offer for Sale (OFS) available for retail investors for investing in the Indian share market.

Standalone OFS and the combined offering of (OFS in the IPO).   

IPO with OFS is a 2-in-1 offer from the company that is going public. This is exactly from where the question about OFS comes to your mind. Otherwise, you won’t know about the standalone OFS mechanism.

I have covered in-depth about the OFS in IPO investment in the article, which you can read below. But let’s first understand the standalone OFS, so that you can differentiate between the two. 

Standalone OFS as per SEBI is

“To facilitate Promoters of listed companies to dilute/offload their holding in listed companies in a transparent manner with wider participation”.

Standalone OFS is conducted by the listed companies to comply with the minimum 25% pubic shareholding SEBI guidelines. 

BSE Upcoming OFS

For listed company promoters and bigger shareholders (holding more than 10% of shares) it is a way to book profits on their initial investments.

Retail investors get an additional window to buy shares of listed companies may be at a discount to the existing market price. The OFS trading is apart from the existing trading system for the normal market segment. 

OFS in IPO

Here both OFS and IPO are done simultaneously by the private company intending to go public by offering shares and getting listed on BSE & NSE.  

For example, the recent Rishabh Instrument IPO is both an IPO with an OFS included. 

OFS in IPO

The company and promoters combine the two processes saving time and money. The IPO money and the OFS money received from the investors are kept separate. The IPO money goes to the company and the OFS money goes to the promoter or the shareholders offering their shares. 

When you bid for IPO, you don’t know where your bid has landed in the IPO portion or the OFS portion. As per SEBI rules, the bids are first for the IPO and then remaining for OFS. But in a heavily subscribed issue with high demand, it really doesn’t matter.

What is the Difference Between OFS and IPO? OFS Vs IPO

An Offer for Sale (OFS) and an Initial Public Offering (IPO) are two distinct methods of raising capital.

Both IPO & OFS involve the issuance of shares to the public, but there are key differences between OFS and IPO which are under 

#1. Purpose

In an IPO, a company goes public for the first time by issuing new shares to the public. This is done to raise capital for various purposes such as funding expansion, paying off debt, or financing research and development.

In an OFS, existing shareholders, such as promoters, venture capitalists, or institutional investors, sell their existing shares to the public. 

The company itself does not raise any capital through an OFS. The purpose of OFS is primarily to provide liquidity to the existing shareholders. No new shares are created. Only the existing shares change hands.

#2. Ownership

An IPO involves the issuance of new shares, which means the company’s ownership is diluted as new shares are created and offered to the public.

In an OFS, the company’s ownership remains unchanged as existing shares are sold from one investor to another. The company itself does not issue new shares or raise additional capital.

#3. Proceeds

When you invest in an IPO, the proceeds from an IPO go directly to the company. These funds can be used for growth, research, acquisitions, or other business activities as outlined in the IPO prospectus.

The proceeds from an OFS go to the selling shareholders who are offering their existing shares for sale. The company does not receive any funds from the sale of these shares.

#4. Underwriting and Pricing

The pricing of shares in an IPO and OFS is determined through the process of book building. The process is the same.

Potential investors submit bids for the shares at various price levels. The final offer price is determined based on the demand generated during this process.

#5. Regulations

IPOs involve regulatory filings, disclosures, and approvals from SEBI and from NSE & BSE for the listing of securities. The company needs to provide detailed information about its financials, operations, and future prospects in a prospectus.

SEBI (Issue of Capital and Disclosure Requirements) Regulation is the base.

OFS also involves regulatory approvals and disclosures, but the focus is more on the selling shareholders and their intentions to sell the shares.

SEBI Comprehensive Framework on Offer for Sale (OFS) of Shares through Stock Exchange Mechanism is followed. 

The operational difference between “OFS” and “OFS in IPO” is under

ParticularsOFS (Standalone)OFS in IPO
Conducted byListed companyPrivate Company
PurposeProvide liquidity to shareholders with more than 10% holdingRaise capital for the expansion and growth requirements.
ProcessInform the exchange 2 days before executing the OFS.File DRHP, get SEBI approval, Conduct book-building and finally list shares
Time Period1 trading dayBidding to listing takes 8-10 days
Reservation for the retail investor10% of the issue size35% of the issue size
Price Price band set by the company in consultation with investment bankerFloor price set by the shareholder selling shares in OFS
You can applyUsing trading accountUsing ASBA, UPI & physical application

Purpose For IPO and OFS Combining by Some Private Companies

One of the primary reasons for conducting an OFS alongside an IPO is to provide liquidity to existing shareholders. Promoters, venture capitalists, and other early-stage investors may want to monetize a portion of their holdings by selling shares to the public. 

Conducting an IPO attracts a wide range of investors, including retail investors, institutional investors, and foreign investors. By combining an OFS, existing shareholders can benefit from the investor base generated by the IPO, potentially leading to better price discovery and demand for their shares.

Where to Find Upcoming IPO

The list of upcoming IPOs can be found on NSE & BSE, Media and news sources, and reputed financial websites covering IPO-related information. 

Here you can find upcoming IPOs on Investing Expert

Where to Find Upcoming OFS

Upcoming OFS can be found only on the NSE and BSE websites

Find Upcoming OFS on NSE

The problem is the whole of OFS process gets over in 2-3 days. So nobody comes to know about it. You need to keep a watch if you want to invest in standalone OFS.

FAQs

How is the price of shares determined in an OFS?

The price is determined through a book-building process where investors submit bids indicating the quantity of shares they want and the price they are willing to pay. The final price is determined based on demand.

But you need to bid over the floor price set by the selling shareholder.

Who can participate in an OFS?

Both retail and non-retail investors can participate in an OFS.

What is the role of SEBI in regulating OFS?

SEBI (Securities and Exchange Board of India) sets regulations and guidelines for OFS transactions to ensure transparency, fairness, and investor protection.

How does an OFS benefit existing shareholders?

OFS provides liquidity to existing shareholders, allowing them to monetize their investments by selling their shares to the public.

Can OFS be conducted after an IPO?

Yes, OFS can be conducted after an IPO. It allows existing shareholders to continue selling shares to the public post-listing.

How is an OFS different from regular share trading on the stock exchange?

In an OFS, a specific portion of shares is reserved for sale, and the price discovery is done through a bidding process, while regular trading involves buying and selling shares on the market.

About Rajan Dhawan

Rajan has covered personal finance and investing for over 5 years. Previously, he was in the IT field for 8 years after completing his MCA but his deep interest in personal finance led him to become an investing expert. He is passionate about investing, stocks, startups, and cryptos.

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