IPO, OFS, and FPO – How are they different?
Initial Public Offering is when a company is introduced into the publicly traded stock markets for the first time. In the IPO, the company’s promoters choose to offer a certain percentage of shares to the public. The reason for going public and the process of an IPO is explained in detail in Chapters 4 and 5.
The primary reason for going public is to raise capital to fund expansion projects or cash out early investors. After the IPO is listed on the exchange and is traded in the secondary market, promoters of the company might still want additional capital. There are three options available: Rights Issue, Offer for Sale and Follow-on Public Offer.
The promoters can choose to raise additional capital from its existing shareholders by offering them new shares at a discounted price (generally lower than Market Price). The company offers new shares in the proportion of shares already held by the shareholders. For example, a 1:4 Rights Issue would mean that every 4 shares held 1 additional share is offered. Although this option looks good, it limits the company to raise the capital from a small number of investors who are already holding shares of the company and might not want to invest more. A rights issue leads to the creation of new shares that are offered to the shareholders, which dilutes the value of the previously held shares.
An example of a Rights issue is South Indian Bank which announced a 1:3(One share for every 3 held) issue for Rs 14 which is 30% lower than the Market Price the stock was trading (Rs 20 as on Record date 17 Feb 2017). The bank offered 45.07 lakh shares to the existing shareholders.
The rights issue is covered in detail in Chapter 11, covering key Corporate Actions.
The promoters can choose to offer the secondary issue of shares to the whole market, unlike a rights issue restricted to existing shareholders. The Exchange provides a separate window through the stockbrokers for the Offer for Sale. The exchange allows a company to route funds through OFS only if the Promoters want to sell out their holdings and/or maintain minimum public shareholding requirements (Govt. PSU have a public shareholding requirement of 25%).
There is a floor price set by the company, at or above which both Retail and Non-Retail investors can make bids. The shares are allotted, if bids are at a cut-off price or above will be settled by the exchange into the investor Demat account in T+1 days.
An example of an Offer for Sale is NTPC limited, which offered a maximum of 46.35 million shares at a floor price of Rs 168 and was fully subscribed in the 2 day period. The OFS was held on 29th August 2017 for Non-Retail Investors and 30th August 2017.
An FPO also has the same intent of raising additional capital after it has been listed but follows a different mechanism for applying and allotting shares. Shares can be diluted, and fresh shares can be created and offered in an FPO. Just like an IPO, an FPO requires that Merchant Bankers be appointed to create a Draft Red Herring Prospectus which has to be approved by SEBI after which bidding is allowed in a 3-5 day period. Investors can place their bids through ASBA and shares are allotted based on the Cut-off Price decided after the book-building process. Since the introduction of OFS in 2012, FPOs are seldom used due to the lengthy approval process.
The company decides on a Price Band, and the FPO is publicly advertised. Prospective investors can bid for the issue using the ASBA portal through Internet Banking or apply offline through a Bank Branch. After the bidding process is complete, the cut-off price is declared based on the demand and the additional shares allotted are listed on the exchange for trading in the secondary markets.
An example of an FPO is of Engineers India Ltd which underwent an issue in February 2014 with Rs 145-Rs 150. The issue was oversubscribed by 3 times. The shares on the day of the starting date of the issue were trading at Rs 151.1. The lower price band was at a 4.2% discount from the market price.
Difference between OFS and FPO
- An OFS is used to offload Promoters’ shares while an FPO is used to fund new projects.
- Dilution of shares is allowed in an FPO leading to change in Shareholding structure while OFS does not affect the number of authorized shares.
- Only the companies with a Market Capitalisation of Rs 1000 crores and above can use the OFS route to raise funds while all the listed companies can use the FPO option.
- Ever since SEBI has introduced OFS, FPO issues have come down, and companies prefer to choose the OFS route to raise funds
Excellent Efforts on clearing the contents… Thank You So Much….
Thanks. I have started now.
This is great,I appreciate alot for this but if it’s in a video form then that will be better
Sure, thanks Ahmed. We will try and do a webinar on this.
Is there a feature in Kite to see the price action of an underlying for a particular day in the past by choosing a date? It is very tedious to scroll all the way back by pulling the cursor.
Ah, not really.
Would you great, if you could forward this feedback to have this feature, to your software development team. 🙂
I’ve done that already, they will review it and implement if feasible.
Poor Service account opening….. No help… No support at all…. I don’t know how you guys are working…
Can you please share your experience on [email protected]?
really very much insighting and value educating for beginners….thanks sir
Happy learning, Raju!
The modules are informative and useful for someone like me who is new to the share market. I am holding 1890 shares of Rana sugars and bought it for 10.20 per share and did not put a stoploss( I was not aware about it). Now the share price is 7.70 Rs as of today. Please let me know the future of the shares
Happy learning, Sabarivasan 🙂
As a business, we do not advise clients on individual shares. So I’m afraid I cannot help you with this.
The content was excellent..but i have one confusion..if compnay has done IPO so it will again go for OFS…it can issue additional shares as a bonus also..
Once the company is listed on the exchange by means of an IPO, it can choose to raise additional capital through OFS(or FPO or Rights Issue)- Cash inflow
Bonus issue is different where the company chooses to reward the shareholders by giving additional shares using its reserves- Cash outflow
I need a small clarification on how the stock price is fixed .. I have given few examples as per my understanding…please clarify me on this:
A company ABC is trading at Rs.325 at a particular time
1)Two persons have placed an order: one for a buy with bid 324 and another for a sell with ask 326.
Assuming these are the only two persons trading for that company at that time.
What happens in this situation. (I think the trading value will remain same!)
A company ABC is trading at Rs.325 at a particular time
2)Now there are three bids and four asks
Bid: 325; quantity -2
Bid: 324; quantity -10
Bid: 323; quantity -6
Ask: CMP(325); quantity -2
Ask: 326; quantity -8
Ask: 327; quantity -4
Ask: 328; quantity -2
In this case, after the shares are traded at 325, the trading price will still remain same at 325…Am i right?
3) How is the open price of a day decided?
4)How is the listing price of an IPO decided?
1) Since the bid-ask does not match, no trade happens. One of them will have to change the price to match the counterparty.
2) Yes, because the top bid-ask does not match. However, if a new guy comes and places a market order, the transaction will go through (for either buying or selling)
3) Based on the bid-ask order book build during the pre-open
4) Book building process
Regarding 3, I would like to quote another example… please do tell me if I am right
Day 1: closing price of a stock ABC is Rs200
As soon as the trading starts company hits UC(240)
MY query is stock price keeps increasing only when there is a buy at any price… But before the market opened no one would have placed a bid for 240 or 230( i think so because no one exactly knows that it will exactly increase by that much percentage) then how will it reach that price as soon as the market opens.
And regarding 4 I was asking how the listing price of an IPO sometimes opens at a higher price…how is this decided.
I think if i get an answer for 3, probably 4 will also be answered
Stock ABC will only hit upper circuit if a trade occurs at Rs 240(A buyer willing to buy at 240 and a matching seller). At Pre-market between 9:00 and 9:15AM there is buying interest for this to occur. Once a non-F&O stock hits 20% limit, buying is not allowed anymore.
For IPO, Pre-open session runs between 9.00 AM and 9.45 AM where orders are accepted. Between 9.45 AM and 10.00 AM, the orders are matched and the listing price is decided at 10.00 AM when it commences for normal trading
I still lack some clarity.
day 0 : closing price of abc is 200
day1 : open is 240(UC)
So between 9 and 9:15 am of day1, there should be a bid placed at 240 with an ask at the same price..
But during that pre open session, no one knows how many bids are placed, right?
Why would someone want to place an order at such a price… ( This point is where I am not getting)
Although you are not able to see the bid and ask during pre-open, the exchange does order matching and that’s how the open price is determined. In your hypothetical case, I’m assuming there’s a lot of demand for the script, and there are buyers willing to pay ₹240. You can read more here.
Regarding 3 – this really depends on the kind of buying or selling pressure in the market. The best way to think about this is by thinking about it as a pressure cooker 🙂
When there is excessive bullishness, price tends to gap up. Likewise with gap downs.
Thanks karthik… Btw the documentation is too good
1 query. If the closing price of stock was 200. And suppose in the pre open session there’s a single bid of 250 and a single ask of 250 and it has matched. So does this mean the stock will open at 250..?
Maybe, if its an F&O stock. F&O stocks do not have upper lower circuits. For everything else, there are circuit restrictions.