IPO, OFS, and FPO – How are they different?
IPO
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.
Rights Issue
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.
OFS
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.
FPO
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….
🙂
Happy learning!
Thanks. I have started now.
Cheers!
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!
Hi Karthik,
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
Hi karthik,
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:
Example:
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
Day 2:
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.
Example: DMART
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
Hi faisal,
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.
Thanks faisal
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
Cheers!
Hi Karthik,
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.
Sir, is there any virtual simulator available for commodity(MCX) and equity trading so that we can try out our strategies without using real money
Don’t think there are any, Soni.
Hi
It was great content.
I Just have a doubt. How does an Offer for sale helps the company to fund itself when the shares which promoters holds are offered in the market. When promoters sells shares the amount received must be accrued to the promoter itself and not to the company.
It depends on who is offering the shares. If the company is tendering the shares, then the proceeds will go to the company. If it is the promoter or some other investors tendering the shares, the proceeds will go to them.
Seriously great content.. I always read this google chrome… When I search zerodha in chrome.. 1st link will be anglebrokering.Com offering zero interest 2nd link will be shown as zerodha.
I request your software team to make zerodha appear 1st when searched about it.
Happy learning, Ram!
This 14th chapter( Supplementary Note) is not included in Module-1 download PDF, please add it as well !
Will be updated soon.
Hi please help me with this.. Is shorting and btst the same? And also is Intraday and shorting same? N is shorting illigal? Please help
Intraday trade is when you buy and sell on the same day. The position is not carried forward to the next day.
Shorting is when you sell first and buy later, shorting in stocks can be done only on an intraday basis.
BTST is when you buy today and sell tomorrow. You cannot sell today and buy tomorrow, remember shorting can be done only on an intraday basis.
Shorting is not illegal.
Karthik if you could please upload some material on Trading in pre market and after market as well. It will be your utmost kindness.
Nothing much you can do in Pre market, Frank. Or at least, I’m not too aware of it.
Well that was a exhaustive read !!! Kudos to the writer/team,well thought out articles…good points to start off…
Good luck and happy learning, Vinay!
Very useful knowledge.
Thanks !
Happy learning, Nilesh!
Hi Karthik and the Zerodha Team,
I am feeling great to finish this unit without a lag, it was so interesting reading like a novel and a good flow of information. Congrats and keep up the good work! Also thank you for the quick response on my question.
I must say that you should publish this in a form of book with selected Q&A from the portal at end of every chapter, if it is not already done! And one more thing, well I understand your intention is knowledge sharing! but If you actually include an assessment (and certificate at the end of the course) every module, it would look more academic and motivating for many people to learn this. And will be big value add to the resume of people who may have no formal financial academic background (like me).
Once again thank you for such a wonderful effort and I am excited to start the next unit, I can’t wait until tomorrow!
Arun
Happy to note this and thanks for the encouraging words, Arun. Yes, everything that you’ve suggested is in the pipeline. We will make this happen this year 🙂
Thanks
Happy learning 🙂
The content is relevant,adequate,and well structured. Kudos
Happy learning 🙂
As I am a bigginer I can say it is vary good module. I have just one query.
How does Bonus Issue, Stock- Split and Rights Issue affect the market
Hardik, Corporate Actions are already explained in this chapter.
Hi Zerodha Team,
For a beginner like me, who did not even know the ABC of stock market, it looked like a cake walk. Though Learning every aspect in detail would be long & tough journey, the content has helped me to build the confidence that I can go ahead.
Thank you so much for the content & the beauty lies in the way it presented!
Glad you liked the content, Vaibhav. Happy learning 🙂
Hi
Awesome content on stock market basics. It was very helpful to understand the terms and concepts of stock market. It was explained very well with great example. Thanks team zerodha.
I have one query regarding UC(upper circuit)
Since UC is fixed at max of 20%, how did some stock trade more than UC in a day? Recent example was RCOM in last week of Dec 2017 when it gained more then 35% in a single day . Another example is PNB which gained about 50% in Oct 2017 when FM announced more funds for PSU banks.
Vikas, stocks that trade in the derivative segment have no circuit limits. RCom, PSU banks are traded in the F&O segment
Glad you liked the content, Vikas.
The circuit limits are not the same across all stocks. For example, Stock A can have a 20% limit and Stock B can have 10%. Also, stocks which have a derivative contract does not have any circuit limits at all (like PNB).
I can’t open the varsity pdf on adobe reader or any other files or else i get the popup to download the Dropbox to view the files can you please help me why it is not supporting on any other reader apart from Dropbox
I’m not sure why, let me check with the team.
Kiran, the PDF files seems to work fine. Can you tell me which module you are trying to download?
Hello,
I wanted to know what is public shareholding requirement? Does it vary company to company?
No, I think at least 25% has to be held by the public for listed companies.
Hello Karthik,
I have a ques relating to UC,
Suppose XYZ stock is trading at Rs. 200 a share and i purchased 1000 shares, Now i want to profit from this by trying to manipulate the stock , so i decided to buy just one share the next day after market opens ( assume the opening price as 200), i placed an buy order of just 1 share for Rs. 210 and i asked my friend to place to place an sell order of just 1 share at Rs. 210.
what do you think will happen,
will my order go through and match my friends order and will the price jump to 210,
i mean is it possible to manipulate the stock with this case.
also assume that my friend which is selling the stock already has some shares of this compny.
Stock also trades in the derivative segment so its free from UC boundations
No, it does not work that way 🙂
The order book works on price-time priority – always the best buy (the one willing to pay the highest price) matches with the best sell (one willing to sell at the lowest). Besides, there is also an exchange surveillance system which keeps an eye out on all these orders trying to game the system.
also assume that my friend which is selling the stock already has some shares of this compny.
Replied to your previous comment.
Lets say I hold 1fut contract(LS=400) of xyz ltd.(price = 1000/share) and this company falls under physical settlement according to SEDI circular released recently. After i exited my position i made a profit of say 1500.
now how will this be physically settled? I will get 1 share of the underlining @1000 but what will happen to Rs 500 that is left out?
Abhishek, since you closed the position, there will be no physical delivery. Physical delivery will only occur if you continue to hold the contract until expiry
If you have squared off the position before expiry, then this will be cash settled.
I completed the first module and 2nd (TA) is in line.
Notes are great and easy to understand, illustrated by real examples.
I would like to suggest why not Zerodha makes a system and certify the registrants who complete(reading) all the modules.
Many people including finance students like me would be happy to get certified through this platform and they can also be converted as a customer of Zerodha.
Just a thought.
Thanks for the notes.
Hemant Chaturvedi
Thanks for the suggestion, Hemant. In fact, we are working on something on these lines 🙂
So what’s the progress in this, Sir?
Progress on what, Siddharth?
I was really exhausted in finding a fully furnished course to learn share market. I Really got tired finding a good material at one place. I am really thankful to varsity that they are providing this educational content FOC and I must say the ways of explaining things and the simplicity of language is really very good and helpful.
Happy to note that 🙂
Keep learning!
Thanks for providing here such precious information in an organised manner. It is easier to understand the topics here on varsity than from any other website.
Glad to know that, Sashi 🙂
Happy reading.
Excellent content. Great for a beginner.
Thanks
Glad you liked it, Ajay!
Keep learning 🙂
Firstly, let me thank you for the wonderful idea & intent behind “Varsity”.
The content is presented with such an ease for learning that nothing looks like a jargon. All read so far only inspires further learning……..!
Secondly, regarding trading on kite, request you to review the possibility and work to integrate the margin calculators with kite so that margins can be seen along selected stocks respectively. That would be a big value addition to kite!
Regards
Hitesh
Thanks for the kind words, Hitesh.
Btw, the margin calculator bit is on the list of things to do. We will do that sometime soon. Thanks.
Dear karthik,
“A rights issue leads to creation of new shares that are offered to the shareholders, which in turn, dilutes the value of the previous held shares.”. Can u plz karthik explain the meaning of above line.
Thanks
Consider this – there are 10 shares before the rights issue and the PAT is 1. The earning per share is 10% (1/10). Now post rights issue, the number of shares increase to 12, but the PAT remains at 1. The new EPS is reduced to 8.33%. Hence dilution.
Hi Karthik
I am thinking to build a personal stock screener from where real-time stock price data gets fetched into excel sheet automatically. And then using SQL to extract data out of it by using certain filters.
Can you please help me with the link/website from where I can get real-time data.
Thanks
Hitesh, I’d suggest you check the API documentation here – https://kite.trade/docs/connect/v3/
sir , thanks for your wonderful work on varsity .
i wanted to know the reaction of the stock when there are either only buyers or only sellers for a stock.
In that case, the stock hits the upper or lower circuit levels.
Sir,read the pdf there awesome,do zerodha have teaching classes or institutes in bangalore?.if,plz send the adress
Thanks, Shrikanth. No, we don’t conduct classes. Once in a way, we do free workshops, you can keep a tab here – https://zerodha.com/educate/
Please tell about Margin On Zerodha. I m unable to find detail on it. What is the requirement to get Margin on Zerodha and all other information? Please Reply with detail and link if possible. Thank You
This post covers all details about our margins. Check the margin calculator to calculate intraday, F&O, Commodity margins
I’d suggest you read our margin policies here – https://zerodha.com/z-connect/tradezerodha/margin-requirements/zerodha-margin-policies. Thanks.
what is the difference when the same stock is shown in NSE & BSE. Currently, I was watching JMTA Share and It was showing 4.60rs in BSE & 4.65rs In NSE? Why is this so?
time 11:34am
https://www.moneycontrol.com/india/stockpricequote/auto-ancillaries/jmtauto/JMT02
These are two different markets, so sometimes such small difference can occur.
so if I purchase a share in Zerodha trading a/ c, in which exchange did zerodha places order? ( please correct me if i m worng, i m in learning stage) thanks for solving doubt.
You can choose the exchange that you’d want. If you dont, then the orders are sent to NSE.
What a great module it is!
Happy learning, Shashwat!
Great Content !
Thank you for this 🙂
Happy learning, Ayush 🙂
I am a newbie to stock market and completed Module 1. I find the contents crisp with detailed examples. I want to dig deeper.
Happy to note that, Vinod. Suggest you read through the remaining modules as well.
Hello Karthink,
Appreciate your efforts in sharing the knowledge in a crisp and constructive way. I have visited several websites and blogs, where we get only partial information. Varsity is the only place where all aspects are covered in detail and easy to understand even if the person is not having any finance background. Is there any plan to cover Volatility based trading aspects in the near future ?
Thanks for the kind words, Divakar. Yes, I do plan to write about it in this module – https://zerodha.com/varsity/module/trading-systems/
It’s very useful for beginners.
Good luck.
Mr. Karthik Rangappa,
Firstly let me complement you on the series of articles which explains complex things in a manner that a novice can understand and actually start to get interested in investing. Great Job, Sir.
Would be great if you can similarly discuss about the role of analytics in decision making w.r.t understanding whether its a good mutual fund to invest or not. We see analytics like Cumulative Return, Annualized Return, Standard Deviation, Sharpe Ratio, Jensen Alpha, Beta, Tracking Error, Information Ratio, etc. and how these numbers corresponding to a mutual fund should be interpreted.
Also there is the Returns based Style Analysis (RBSA) which is useful to understand the Manager’s Style and if explained in a manner how Style Maps and Asset Allocation output of RBSA needs to be interpreted, it would be great.
Looking forward to your response to the above,
Thanks & Regards
Venkatesh Prasad B.K.
Venkatesh, I’m glad you liked the contents in Varsity. A module on MFs is long overdue. I will write about all these factors and more in that module 🙂
Hi sir,
I truly thank you for sharing the knowledge and this module helps a lot,where u always try to keep the things practical.I want to know can a normal person like me having reasonable knowledge can earn 5k daily by investing,i am not asking guarantee just i want to know.Thanks in advance.😊
Ravi, I have seen very few people who can consistently do that. It may be possible, but requires a lot of practice and discipline.
Firstly, I would say thank you so much sir for sharing your knowledge and also thanks to zerodha for such a great initiative step taken by them.
For a long time, I was searching systematic process of knowledge and content which could cover basics of stock market for beginners.
In first module i learned many new thing and i think remaining module will also help a lot to learn and explore stock market knowledge with zerodha. once aganin thanks sir….
Happy to note that, Hemant!
Good luck and hope you will continue to enjoy reading Varsity 🙂
Hi Karthik sir,
I have a query regarding the material.
Is it necessary to stick with the order in which the modules are there
I mean I’ve completed 1st module now, should i stick with the order (next chap is TA)
or can i start with FA(3rd module) ?
and Thank you for the material to Karthik sir and team.
The module order is not really required, Rajan. You can move to any module that interests you. All modules assume you are starting fresh and takes you through from basics. Good luck.
From last 8 months I m reading chapters publish with varsity zerodha and feeling like studying basics. The language pattern which is used is very clear to grasp easily. Efforts made to cover every part of basics are really good. It shows that zerodha wants to provide typical investors and traders to the stock market. Thank you.
Glad you liked the content, Ankush! Happy reading 🙂
Hi ! Karthik . wish you happy and prosperous new year 2019.
would like to have full knowledge on option and futures derivities.
i am member of zerodha & would like to trend in the market please help me.
Happy new year to you as well 🙂
We have the content around this already – https://zerodha.com/varsity/module/futures-trading/ and https://zerodha.com/varsity/module/option-theory/
Thank you varsity for this highly valuable information. Lately i have been researching on stock market and this is the best resource i have stumbled upon.😊
Happy to note that, Aman! Good luck and keep going!
Sir,
First of all let me appreciate you and the entire team of Zerodha for this splendid initiative.
I want to know more about futures and options market. Which chapter deals with that topic?
(I’m very new to stock market and is trying to make an understanding of the same)
Abhay, module 4 deals with Futures, 5 & 6 deals with Options.
I just completed first module. Can’t wait to start the next one. I’m sure it’ll help me to be an smart investor, rather just following stupid suggestions on TV and other so called investors.
I hope you get all the info, Shreyansh 🙂
Good luck!
Best material to begin with and proceed to expert level in the field of stock market .
Thanks, Dhiraj! Happy reading 🙂
Clear and concise, thank you !
Cheers!
Thanks
Nice concept by zerodha.. but please also help us to understand commodities better
There is an entire module on commodities, Vibhu – https://zerodha.com/varsity/module/commodities-currency-government-securities/
Thank you…
Sorry I didn’t notice that
Good luck!
Hi,
When a company decides to raise money through OFS or Right issues, shares offered are from company’s reserved authorised shares or from promoters share holding stakes?
Divesh, the shares can come from either…but mainly the reserved shares.
So, do companies declare from where they are allotting shares? Because if promoters are offering their own shares, then isn’t it a negative sign and shouldn’t the buyer be aware of it?
Yes, they have to do this.
Excellant explaination of concepts!!!
Good luck and happy reading 🙂
Thanks!!! I learned many new thngs
Happy learning!
Hi,
I hold a zerodha account and am planning to move to US for work. As of now, I don’t know how long I will be there – a year or a few years. Hence, I want to know :
1. if I can continue holding the zerodha account in India . Is there a time limit?
2. Can I remit money from US to my Indian bank account and keep trading in my zerodha account?
I wasn’t sure under which topic to put the query, hence asking here.
Thanks for your help!
Regards
The onus of getting his residential status changed vests on the client. If you become an NRI, you have to inform us and trade through PIS. Otherwise, yes, you can continue to hold the account. Yes, you can remit the money to your local bank account and continue to trade with us (as long as his residential status doesn’t change). We just need to receive money from the mapped account.
I am not able to understand much about OFS and FPO. Will it be covered in further modules? And I have some in-general doubts regarding trading. I am student and will be starting a job in 6 months. So, will I be able to earn more by following guidelines and learning the modules or it also depends more on luck factor. Earlier, I had lost much money on crypto-currency because I did not have any knowledge and was trading on random people’s guidelines. Hoping to learn some good techniques in this modules and earn like professionals.
No more modules on FPO and OFS. Is there anything, in particular, you did not understand, I will be happy to explain. Good luck for your job and happy reading 🙂
Thanks to the team Zerodha . Very useful info and i have been using the zerodha account from last 2 years but never been through this content. Thanks so much.
Glad you like the content, Venu. Happy reading.
Hi Karthik,
As FPO is about issuing fresh shares, how will they issue without reducing the promoters shares?
If they do then it will be like OFS only.
Once they issue within the existing shares, is it like stock split?
How exactly they can FPO without reducing the existing ones?
Please explain
FPO dilutes the shareholding of existing shareholders. The stock split is different when you look at it from a balance sheet perspective.
What is V-Wap trade, Over the day trade, Volume trade, Limit order, CD order & execution of this types of trades and criteria on various exchanges. Karthik plz help me out plz reply and i have a interview based on this question
Niraj, have explained all these and more across various chapters, suggest you read through them. Good luck with your interview.
Hello Karthick,
Can you please provide me some clearance about Short Selling. I know we can go Short in Interday and in F&O but I need to know whether there is an option available to Sell now and buy back the shares later. Fox Example, I like to sell Yesbank Shares now and buy back them after few months, This is possible if I rent the shares and give back with a premium, but I am not sure how to implement this with broker. When I try to sell them without buy , the message I get is ‘I don’t have Yes bank shares in my demat’.
Thanks
Thats right. The only option is to short the futures and roll the position forward.
few thing are missing from the pdf version (ex: upper circuit/lower circuit) of this module,also page numbering is also not proper.
Will check this again. Thanks.
what is NISM series 8 examination?
If you want to work for a broker as a dealer, then you need to give the NISM series 8 exams.
Thank you sir.
I have been looking forward to understand the basics for a long time and have gone through various videos on youtube. One of my friend recommended Zerodha Varsity and I must acknowledge, the content is simply fab. It is indeed explained in a manner that any layman can understand the basics and enter the market. Thanks to entire Zerodha team for putting this together and helping people like me take the steps.
Thanks for the kind words, VD! Happy reading 🙂
Hi Sir,
Could you also explain the difference between Direct listing & IPO? for ex; Spotify opted for direct listing.
I think this explains the difference quite well – https://www.investopedia.com/investing/difference-between-ipo-and-direct-listing/
Thanks Zerodha for excellent effort and your contribution.
Can you please provide some light on Valuation of company after Rights issue or OFS options.
Thats an interesting topic, will try and put up something on these lines.
sir
how can we claim a very old debenture(say 20 years old) of a company /communicate to company .
thanking you
Hmm, I’m not sure. Please do get in touch with the company directly for this.
Asking this just to confirm! The face value of a share decreases after Rights issue, right?
No, the rights issue has no impact on face value. Stock splits do.
Hi Karthik,
Here you wrote the cut-off price is the price decided after the book building process and within the IPO chapter you told me cut-off price is the upper price of the price band so what exactly is cut-off price?
Ah, sorry if I confused you. It is the price at which the shares will be issued, if the stock is oversubscribed, it is usually at the upper end of the price band.
Not enough idea about how FPO is traded in markets, its just a question for clarification.
Coming to YES Bank FPO, current market price of Yes Bank is around Rs.25. FPO is offering at Rs.12/13. Will this affect the value of the share for existing investors who brought at higher rates. Is it loss to existing investors.
Ex: Assuming my current average buy price of this share is Rs.40, market price is today is Rs.25. I am at loss of Rs.15 per share.
No, it is just that you get to buy it at a lower price at a time when the stock is trading at a higher price in the market.
Hi,
Can you please explain FPO process little more with example.
Lets take an example of YES bank. I am seeing bid price range is 12 to 13.
What happens if i bid share price as 12 ?
what happens if i bid share prices as 13 cutoff price?
Please explain in detail.
Regards
Ashok S
This is similar to IPO, chances for getting allotted is higher at the higher end of the bid.
What will happen if FPO is not fully subscribed?
Its just that the promoters won’t get the funds they intended to raise.
Dear sir,
M&M has announced rights issue to the ratio of one share per one share held.
The board has fixed the record date for the purpose of determining the shareholders of the company who will be eligible to receive rights entitlements in the issue, as of July 23.
Today is July 20. If I buy shares today, they will be in my demat account by July 22.
So will I be eligible for rights issue?
You will get it by 22nd evening. Technically you should be eligible, but its a touch and go kind of situation.
And sir if I do get eligible, how will I be able to access that rights issue?
Is there any kind of window or something on the terminal?
P.S. I use Zerodha’s Kite.
Yes, look for the corporate action window in Console.
Hello sir. I would like to know about right issue, why reliance right issue listed on exchange separately & price also not decreases and other side M&M finance share price reduces after right issue amd and not listed separately… Hope for your kind reply..
Rakesh, I’m really not sure why RIL did this and M&M did not:)
Sir With respect to concept of Ex Div date and record date in conjunction
Scenario 1: 11th I buy stock, 11th is Ex Div date and 12th is record date = Am I eligible for dividend
As stock is deducted from seller account and is with broker for credit to buyer, is broker receives dividend if not buyer or seller.
Scenario 2: 11th I buy stock, 11th is Ex Div date and 13th is record date = Am I eligible for dividend.
Here buy means buy date, but settlement of shares occurs on T+2 , So I am not holding share in my demat account on buy date.
Scenario 3: 10th I buy stock, 11th is Ex Div date and 12th is record date = Am I eligible for dividend.
Scenario 4: 12th I buy stock,11th is Ex Div date and 13th is record date = Am I eligible for dividend.
Scenario 5: 10th I buy stock,11th is Ex Div date and 12th is record date = Am I eligible for dividend.
can you tell me in above scenarios what happens.
1) No
2) No
3) Yes
4) No
5) Yes
Is it purely because of the lengthy documentation process that FPOs are not widely used? On the contrary, if applying for an OFS is allowed only if the promoters want to reduce their holding/the company needs a min public shareholding, then how is OFS more popular than FPO? Most companies applying for an OFS may be doing it just for the sake of creating more capital, right? Why is OFS more popular?
Perhaps, OFS is a simpler process since it deals with existing shareholders and not new ones. Yes, OFS is to raise capital.
there is one question irking me regarding bonus
so if a company announces 1:2(one share for every two shares held), then how will a person holding a single share be rewarded
and there is some issue, I am not receiving mail for the answers which you feed. I have checked inbox junk as well as trash
thank you
The one share guy will be compensated in cash on a pro rata basis. Btw, there is no email notification for responses. You will have to manually check for the response, I know it not the most user friendly way, but there is int much we can do as the notifications soon turn to spam as more comments pour in.
Hi,
Few questions-
1. For Rights issue, you mentioned previously held share value is diluted. When Reliance announced rights issue, the share value didn’t dilute moreover market was bullish leading to increased value. So I didn’t understand why share value would be diluted?
2. For OFS, is there any cut off price above floor price for the bids? Like IPO/FPO, where we have price band to quote the value.
3. What do you mean when you say dilution of shares in FPO? Dilution of shares happen only in stock split right?
4. In case of OFS, shares made public should be exclusively held by Promoters whereas for FPO, the shares offered to public can be from Promoters/organization shares (which doesn’t belong to anyone) etc. right?
1) I think there was a dilution of 7% equity. You may want to re check this
2) OFS is usually a fixed price
3) Dilution happens when new shares are issued
4) OFS can also include shares from large existing share holders.
So it is mentioned that on order to take the FPO route the shares need to be diluted so that fresh shares are published. How exactly does one happen to dilute their shares?
Assume you have 100% of shares, you give 10% to an external investor against some funds, then you are said to dilute the shares to the extent of 10%.
Ok. That makes sense. Thanks a lot.
Happy trading!
Excellent content. Thanks for all your efforts.
Could you please clarify these?
1) “An OFS is used to offload the shares of Promoters while an FPO is used to fund new project.”
OFS also is a fund raising activity isn’t it ? OFS also offloads promoter shares right?
2)”Dilution of shares is allowed in an FPO leading to change in Shareholding structure while OFS does not affect the number of authorized shares.”
What does it mean when you say it doesnt affect authorized shares?
1) Yes
2) In FPO, new shares are introduced, but in OFS, the existing shares are sold, hence there is no dilution.
Sir, I heared about OFS is that, “company sold its shares to the intermediary and then the intermediary sold that shares at a price higher than that company sold to them.”….Is it true? sr…..
…..
Sr, I have an another question about ASBA portal..what it is??
Hmm, this could be a modality. Not sure which company you are talking about here. ASBA is a facility through you transact in an IPO. Do check this – https://support.zerodha.com/category/trading-and-markets/corporate-actions/articles/what-is-asba
Dear Karthik,
First of all thank you so much for providing the material in very systemic way.
i have few queries
1. what do you mean by “Shares can be diluted and fresh shares can be created and offered in an FPO”. for introducing new share in FPO does company have extra unallocated share?
2. What are the circuit restrictions for the non f&o stock.
Thanks and Regards
1) Yes, unallocated shares which are newly issued
2) Depends on the stock’s liquidity and volatility
Dont you update data and information etc of topics on regular basis.when you have last updated.plz let me know kindly.reply awaited
Could you please explain Cashing out of Early Investors…..
This means that the early investors book out profits by selling off the stock.
Hey Karthik,
Excellent efforts..
Do you think it’s appropriate to discuss about QIP along with these topics.
QIPs are usually for institutional players. Dont think Retail can participate in QIPs yet.
Is during dilution of shares, there is necessarily increase in authorised share of the company?
Not really.
If a company releases new shares in the market from its own corpus of shares(without increasing Authorised shares), then how could it affect percent of ownership of existing shareholders? Is not it is a simple transfer of some percentage of ownership of company to new shareholder?please clear it with a example. Thanks.
It could be a promoter offloading shares right?
Great content!
Happy learning!
Its was little hard to understand need more examples in simple manner.
Ok, will try to add.
Hello Sir,
Lets say a company X has a promoter holding of 30% and the rest is with DII/FII.
What happens to said promoter holding in the following scenarios?
1) Buyback promoter holding increases correct?
2) Rights??
3) ESOPS??
4) Bonus??
All of this depends on the company’s capital structure. Fresh capital can be raised by inducing new equity as well.
Hello Sir,
1) When a company announces a rights issue are they providing the payment from their reserves or surplus?
2) Now that the company rights are traded in the market, If I were to purchase said rights from the market, could essentially profit by purchasing rights at a lower price while the CMP is substantially higher?
1) Usually from the reserves
2) Yes
Hello Sir,
A bonus essentially just dilutes the number of shares in the market by increasing the quantity of shares while reducing the price of each share by the appropriate amount correct?
A split reduces the face value of a share but eventually has the same result on the share price and share quantity.
Companies do this if their share price is very high and would like to create more liquidity in the market.
Why would a company choose a bonus from a split or vice versa?
Yes, thats correct. Bonus has a balance sheet impact – money goes from reserves to share capital. This is not the case with split. In the longer term, bonus probably is more rewarding to share holders.
Hello Sir,
Why is a bonus more rewarding than a split?
Ah, actually maybe I should just take that back. They both are similar 🙂
But nobody explained what FPO stands for…
Why promoters go for Offer For Sale when they can sell the share directly in stock market from their zerodha kite app like retail investors sell? Why so much fancy drama?
Promoters selling becomes a personal affair. They do this when the intention is to raise funds for the company.
Hello Sir,
When a Promoter sells shares of his company, does the promoter reinvest that money into the company as a loan or just decides to use it for his own personal use?
Depends on the purpose of the sale 🙂
But why can’t they simply sell in the stock market directly ? Why offer for sale? Why to even give a discount of Rs 1?
SEBI has rules around promoters selling the stake, Shubham.
Thank you, this really helps as im so clueless
haha
Good luck and happy learning 🙂
I registered for the 12th February 2022 Quiz which was posted on the Zerodha Varsity Instagram handle.
Will all the modules be tested or just this one or any other one specifically? I’ve started revising the modules, can you please clarify what will be tested so one can prepare accordingly?
Thank You.
It spans across all the content on Varsity. Give it a try 🙂
What about QIP ? Any reason that isn’t mentioned
No particular reason, guess it was inadvertently omitted.
Hi,
In OFS, promoter dilutes THEIR stake & there is no issue of fresh capital for the company . Whatever the proceed will be from diluting the stake will belong to the promoter.
So how OFS help the company to raise the funds?
OFS is basically an offer for sale, usually, its the company’s promoters/shareholders offloading shares. So does not always lead to company raising funds.
Excellant example of Pressure cooker for this Upper/Lower circuit.
I strongly recommend creating hyperlinks like wiki do…especially for abbreviations and technical terms.
sir
1. what is dilution of shares(in relation to ofs,fpo)
2. what are authorized shares
3. what are outstanding shares
1) Shares that are offered for fulfilling a corporate action.
2) Shares which are subscribed by investors
3) Shares that are available to trade in the market.
>> Dilution of shares is allowed in an FPO leading to change in Shareholding structure while OFS does not affect the number of authorized* shares.
I think it should be outstanding* shares?
Let me look into this. Thanks 🙂
Only the top 200 companies by Market Capitalisation can use the OFS route to raise funds while all listed companies can use FPO option.
PLEASE UPDATE THIS companies by Market Capitalisation OF 1000 CRORES AND ABOVE CAN PARTICIPATE IN OFS NOW AS PER SEBI GUIDELINES
@
Checking this.
Hi Sir,
when retail investors can start trading? Is it after IPO? since ipo comes in lots, when it will be available to trade small quantity?
Thanks.
Yes, the day the stock lists on the stock exchanges, you can start trading.
Please add this supplementary material to the module pdf..
Noted.
can you explain me about OFS with one more example
Will be putting up a video on this soon, Narendra. Do keep and eye on our channel.
Hi Karthik,
I am not entirely clear on how a Rights Issue leads to share dilution.
If the total number of shares is being increased from say 1000 to 2000, does that mean every shareholder’s investment value will be halved? Or will the number of shares being held by each investor automatically double in order to conserve their investment value?
Thank you.
Value will remain the same, but the future earnings will be divided across more shareholders, Keshav. So, the dilution.
Noice learning!! Thank you for clearing the concepts
Sure, happy learning Saddam.
Hello Karthik,
Nice Explanation
I have a major doubt, regarding dilution of shares and it’s value when a company goes for IPO/OFS/Rights issue/FPO
And what does Fresh issue mean? Is there an alternate to fresh issue?
Fresh issue means that the company is infusing new equity shares into the company, Jayesh. These shares are from authrised but not net issued. Check this – https://www.youtube.com/watch?v=q-T2svXZ77s&list=PLX2SHiKfualGOP9093b6qo11EsgCz8IuQ&index=11
Sir i have a question, does company offers OFS cheaper than the CMP or at CMP ?
It is usually at price around the CMP, maybe higher to make the OFS look attractive.
Hi
I am curious to know when a company makes an IPO and now shares are trading on an exchange. But now when they make an fpo at what price are the shares going to be offered in and FPO whether CMP/IPO PRICE or any other price.
Thank you
They will announce that price, usually at a discount to current market price.
I am grateful to Zerodha for providing good presentation of concepts related to finance and stock market. Stock market concepts which looked monotonous and laborious to me earlier, were very well simplified in your videos and modules
Thanks for letting us know, Satyam. Happy learning 🙂
In the starting it was mentioned that the main purpose of OFS & FPO is the procurement of capital after the company is listed in secondary markets. But in case of OFS, the money goes in the hands of promoters so how does OFS benefits the company in capital procurement process ? Doesn’t it benefits the promoters only ?
Depends, there could be an OFS just to gain some liquidity from promoters. So it really depends. Do read the reasons for OFS, that will give you a perspective.
Hii Karthik, great content
Can you clarify this.
IPO is basically book biding process to find the right price for the listing
And whereas secondary market starts ones it listed in stock market at the price decided right?
The market forces decide on the price Manoj. This is called price discovery 🙂
What is ASBA Portal
ASBA for IPO applications. Check this – https://support.zerodha.com/category/console/ipo/other-ipo-queries/articles/what-is-asba
I have shares of a company, their price is 13 rupees and the company has come with FPO with the price of 11 rupees, I applied in fpo, shares are allotted, in the price of 11 rupees, now on the day of listing,my question is (the script of fpo shares is listed separately ? or it happen that the shares before by at 13 will fall in the average price of 12 rupees and after the FPO share 11 price alloted?
Check this, hopefully you will have your answers – https://www.youtube.com/watch?v=m7U4liUJAkE