What Makes An IPO Different From An OFS

If you’ve recently started investing or are exploring new opportunities in the stock market, you might have come across two popular terms — IPO and OFS. While both allow investors to buy shares of companies, they are fundamentally different in their purpose, process, and benefits. Understanding these differences can help you make informed decisions when planning to participate in either.

This article aims to clearly explain IPO vs OFS, highlighting the mechanics, benefits, and critical differences between them. Whether you're a retail investor or just getting started, this guide will help you confidently navigate both options.

What Is An IPO?

An IPO (Initial Public Offering) is the process by which a private company becomes a listed entity on a stock exchange. This is done by offering its shares for the general public to purchase on the stock market, for the first time. It marks the company’s transition from private ownership to public ownership and is a significant milestone for the business.

Key Features Of An IPO:

• New Capital Raising: In an IPO, the company issues new shares to raise fresh capital, which it can use for expansion, debt repayment, R&D, or other corporate purposes.
• Regulatory Oversight: The process is closely monitored by SEBI to protect investor interests and ensure transparency.
• Eligibility and Allotment: Retail, HNI, and institutional investors can all participate. Shares are allotted based on demand and application categories.
• Fixed Price or Book Building: IPOs are generally priced either through a fixed price method or book-building process (a price band is declared).

Benefits Of Investing In IPOs:

• Early Access to Growing Businesses: IPOs offer investors a chance to be part of the company’s growth story from the very beginning.
• Listing Gains: If the IPO is well-received, shares may list at a premium on the stock exchange.
• Portfolio Diversification: IPOs give investors access to sectors or companies not previously available on the stock market.

Things To Keep In Mind:

• Valuation Risks: Some IPOs may be overvalued based on market sentiment.
• Allotment Uncertainty: High demand could lead to partial or no allotment for retail investors.
• Volatility Post Listing: Newly listed stocks can see sharp price movements in the short term.

Additional Read: 8 Tips to Increase Your Chances of IPO Allotment

What Is OFS?

In an OFS (Offer for Sale), promoters or major shareholders of an already listed company are given the opportunity to sell their existing shares to the public, in the stock market. Unlike IPOs, no new shares are issued, and the company doesn’t raise new capital.

Key Features Of An OFS:

• Shareholder Exit Route: Used primarily by promoters, government, or large investors to reduce their stake or meet minimum public shareholding norms.
• No Fresh Capital: Since shares are already in existence, the money raised goes to the selling shareholders, and not the company.
• Auction-Based Mechanism: Conducted over a single trading day through a bidding process on the stock exchange.
• Limited Participation Window: The OFS opens for a very short time, usually one trading day (sometimes two).

Benefits Of Investing In OFS:

• Discounted Pricing: Retail investors often get a small discount (up to 5%) on the floor price set by the promoters.
• Access to Blue-Chip Stocks: OFS is frequently used by well-established companies, giving investors a chance to own reputed businesses.
• Transparent Process: Since OFS happens through stock exchanges, it's regulated, seamless, and visible to all investors.

Things To Keep In Mind:

• No Capital Infusion: You’re not funding company growth, you’re simply buying existing shares from another investor.
• Short Participation Window: You need to be alert and act fast as OFS is open for a very limited time.
• Market Sentiment Sensitive: OFS price movement post-sale can depend on broader market sentiment and selling pressure.

OFS vs IPO: Explained in Detail

While both IPO and OFS help investors buy shares, the purpose, structure, and investor experience are notably different. Let’s examine the key difference between IPO and OFS across some key parameters:

Purpose

• IPO: An IPO is used when a company is getting listed on the stock exchange for the first time. The primary goal here is to raise capital for business expansion, repay debt, improve infrastructure, or fund acquisitions. Since new shares are being issued, the money collected goes directly to the company’s coffers.
• OFS: On the other hand, an OFS is used by existing shareholders (typically promoters or large institutional investors) to sell their stake in an already-listed company. There’s no capital inflow into the company itself. It is merely a transfer of ownership from existing shareholders to new investors. OFS is often used to comply with SEBI's minimum public shareholding norms or for promoter exit/partial profit booking.

Type of Shares Offered

• IPO: IPOs involve the issuance of new shares, thereby increasing the total outstanding shares of the company and slightly diluting promoter holding. This is an expansion of equity.
• OFS: In contrast, an OFS involves the sale of existing shares held by current shareholders. There is no change in the company’s total share capital, but just a shift in ownership.

Company Status

• IPO: An IPO is for companies yet to be listed on any stock exchange. As a result, you do not have access to market-led valuation or trading history, which makes it a relatively higher-risk investment. You are essentially investing based on future potential and prospectus disclosures.
• OFS: OFS is conducted by already listed companies, and investors can review the company’s past stock performance, financials, and historical returns before investing. This adds a layer of transparency and helps investors make data-backed decisions.

Investor Categories 

• IPO: In both IPO and OFS, a portion is reserved for retail investors. In IPOs, the retail portion is typically up to 35% of the issue size.
• OFS: In OFS, 10% is usually reserved for retail participants, often with a discounted offer price as an incentive. However, OFS tends to be less aggressively marketed, and unless investors stay informed via broker platforms or exchange announcements, they may miss the opportunity.

Allotment Method

• IPO: If an IPO is oversubscribed, the allotment is often done via a lottery or proportionate method, especially for retail applicants. This may result in partial or no allotment if demand is extremely high.
• OFS: In OFS, bidding is real-time through the exchange. Investors are allotted shares based on price priority and order time, making it more transparent. However, allotment is not guaranteed and depends on how competitive your bid is.

Time Frame 

• IPO: IPOs usually remain open for 3 to 5 days, and the allotment process may take around 7 working days post-closure. Once allotted, the shares are credited to the investor’s Demat account and begin trading on listing day.
• OFS: OFS is much faster. The bidding window is usually open for just one trading day, and shares are allotted and credited to investor accounts within 1-2 days. This quicker turnaround makes OFS ideal for investors seeking faster deployment.

Summary Table: IPO vs OFS

Additional Read: IPO V/s FPO: Difference Between IPO & FPO | Mirae Asset