IPO vs FPO vs OFS vs Rights Issue: A Quick Guide

Post Date : December 16, 2024

Introduction

The stock market offers various ways for companies to raise capital and for investors to participate in ownership. However, terms like IPO, FPO, OFS, and Rights Issue can be confusing, especially for beginners. This guide simplifies these concepts to help you understand their significance, processes, and differences.

Initial Public Offering (IPO)

An IPO is the process through which a private company offers its shares to the public for the first time to raise capital.

• Purpose: Fund expansion, pay off debt, or improve the company’s profile.
• Process: Companies work with investment banks to determine the offer price and issue shares.
• Investor Impact: Offers an opportunity to invest early in a growing company.

Example: When Zomato went public, its IPO was highly anticipated in India.

Follow-On Public Offering (FPO)

An FPO is when a company that is already publicly listed issues additional shares to investors.

• Purpose: Raise more capital post-IPO.
• Types:
  • Dilutive: Increases the total number of shares.
  • Non-dilutive: Shares are sold from existing shareholders.
• Investor Impact: Share prices may fluctuate depending on the demand and supply of new shares.

Example: TCS issued an FPO to raise capital for expansion projects.

Offer for Sale (OFS)

An OFS is a mechanism where existing shareholders, often promoters, sell their shares to the public.

• Purpose: Enable promoters or large investors to reduce their stakes.
• Features:
  • Quick and simple compared to IPOs or FPOs.
  • Shares are sold at market-determined prices.
• Investor Impact: Typically offered at a discount to encourage participation.

Example: The government of India used OFS to divest shares in PSUs like ONGC.

Rights Issue

A Rights Issue allows existing shareholders to buy additional shares directly from the company at a discounted price.

• Purpose: Raise funds while giving preference to current shareholders.
• Features:
  • Issued in a specific ratio (e.g., 1:5, meaning 1 additional share for every 5 held).
  • Non-compulsory for shareholders to participate.
• Investor Impact: A cost-effective way to increase investment in the company.

Example: Reliance Industries used a Rights Issue in 2020 to raise ₹53,125 crore.

Key Differences