Offer for Sale and a Fresh Issue in an IPO

Hundreds of companies raised funds through IPOs during the recent IPO craze on Dalal Street. The total money raised through these IPOs was 57,000 crore rupees, however did you know that only 20% of that amount went to the firm and the remaining 80% went to the leaving investor? This is where the concepts of Offer for Sale and a Fresh Issue come into play.

Offer for Sale and a Fresh Issue in an IPO

What is the Difference between Offer for Sale and a Fresh Issue in an IPO?

Consider the following scenario to better understand:

You own the ABC Corporation. This business sells soap. Let’s pretend you and a friend founded this corporation. The capital of this firm is made up of 1,00,000 shares, each costing 100 rupees. You each possess 50,000 shares of 100 apiece. As a result, the company’s total value is $1,000,000 (1,000,000 shares * 100).

Let’s say your business makes $100,000 in 2007. You and your friend are each entitled to $50,000 because you and your friend own 50% of the company.

Profit-sharing can also be depicted in the manner it is done in a publicly traded corporation. Because a company’s total shares are 1,00,000 and its earnings are 1,00,000, the earnings per share is one (1,00,000 divided by a total number of shares which are 1,00,000). Because you and your friend each hold 50,000 shares, your respective earnings are 50,000 into 1 = 50,000.

Let’s pretend the company made a profit of $10,000,000 in 2017 (their respective portion of profits is 5,000,000, and earnings per share is 1000). The company is looking to raise money and is considering an IPO. They can then choose between an Offer for Sale and a New Issue of Shares.


You may also read about: What is Face Value in IPO?


What is a Fresh Issue?

This is the process of issuing new equity shares to the company and then selling those shares to investors. Consider the case of a corporation with 20 shares and a profit of 30 rupees. Earnings per share are 1.5 rupees (30 rupees/20 shares), as expected. The company now has to raise capital, so it issues new shares (say, 10 shares at 2 rupees each) and raises 20 rupees. However, because of the new shares, earnings of 30 rupees will be divided into 30 shares rather than the previous 20. (EPS falls to 1 rupee per share from 1.5 rupees per share).

What is an Offer for Sale?

An existing promoter/investor of the company may sell shares through an offer for sale. Let’s have a look at an example. We have a corporation called ABC, in which A owns 70% and B owns 30% of the company. Now that B intends to reduce his ownership to 15%, he sells 15% of his entire shares through an offer for sale. B will receive all of the funds raised because he is selling his own shares rather than issuing new ones. The primary benefit of OFS is that it does not result in equity dilution; nevertheless, the primary downside is that the firm does not get any of the funds raised.

For listed firms, an offer for sale (OFS) is a simplified means of selling shares through the exchange platform. The procedure was initially implemented by India’s securities market regulator SEBI in 2012 to make it easier for promoters of publicly traded firms to reduce their ownership and meet the minimum public shareholding requirements by June 2013. The strategy was widely used by public and private listed firms to comply with the SEBI mandate. Later, the government began to use this method to sell its stake in public-sector companies.

Conclusion

As a result of the foregoing, IPO or OFS investments can be viewed as investment vehicles for reaping the benefits of decentralized share offerings. The decision to invest or not invest should be made with caution and after consulting a reputable firm.