Fresh Issue vs Offer for Sale in IPO: An Easy Guide

Imagine a company called XYZ Ltd. If XYZ Ltd. is planning to go public and raises Rs 100 crore through the IPO

When a company decides to go public and offer its shares to the general public through an Initial Public Offering (IPO), it can choose to do this in one of two ways: through a Fresh Issue or an Offer for Sale (OFS). These two methods can sound confusing, but they are actually quite simple once you understand the difference. Let’s break it down.

What is an IPO?

An Initial Public Offering (IPO) is when a private company offers its shares to the public for the first time. The goal of an IPO is often to raise money, expand the company, and provide a way for existing shareholders to sell their shares.

What is a Fresh Issue?

In a Fresh Issue, the company itself issues new shares to raise funds. This means that the company is creating new shares and selling them to the public. The money raised from selling these shares goes directly to the company, which can use it for various purposes:

• Expanding its business
• Paying off debt
• Investing in research and development
• Strengthening its balance sheet

Key Points about Fresh Issue:

• New shares are issued by the company.
• The company gets the funds raised.
• The total number of shares in the market increases after the IPO.

What is an Offer for Sale (OFS)?

An Offer for Sale (OFS) is when existing shareholders of the company (such as promoters, investors, or early backers) sell their shares to the public. The company itself does not receive any funds in an OFS. Instead, the money raised goes directly to the shareholders selling their shares.

In this case, the total number of shares in the market remains the same because no new shares are created. The existing shareholders are simply transferring ownership of their shares to the public.

Key Points about Offer for Sale:

• Existing shareholders sell their shares.
• The company does not receive any money from the sale.
• The number of shares in the market stays the same.

Key Differences Between Fresh Issue and Offer for Sale

Why Do Companies Choose These Options?

1. Fresh Issue: Companies prefer issuing new shares when they need to raise capital for business expansion, paying off debts, or making new investments. It helps them grow while getting public investment.
2. Offer for Sale: Shareholders, such as company promoters or early investors, may sell their shares through an OFS if they want to cash out some of their investments or reduce their ownership in the company. The company does not receive any money, but it can still benefit from the increased visibility and liquidity that comes with an IPO.

Can an IPO Include Both?

Yes! In many cases, an IPO can be a combination of both a Fresh Issue and an Offer for Sale. For example, a company might issue new shares to raise funds (Fresh Issue) and, at the same time, allow existing shareholders to sell some of their shares (OFS). This way, the company can raise money for its growth, while the existing shareholders can also take some profit off the table.

Example

Imagine a company called XYZ Ltd. If XYZ Ltd. is planning to go public and raises Rs 100 crore through the IPO, it could decide that:

• Rs 60 crore will be raised by issuing new shares (Fresh Issue).
• Rs 40 crore will come from selling shares that are already owned by existing shareholders (OFS).

In this case, the company will use the Rs 60 crore for its expansion, while the Rs 40 crore will go to the existing shareholders who sold their shares.

Conclusion

Both Fresh Issue and Offer for Sale are methods used by companies and their shareholders to raise money or sell shares during an IPO. The main difference is that in a Fresh Issue, the company raises funds by issuing new shares, whereas in an Offer for Sale, the money goes to existing shareholders, and no new shares are created. Sometimes, companies use a combination of both methods to balance raising funds and allowing shareholders to exit or reduce their stake.

Disclaimer: The article is for informational purposes only and not investment advice.