While the current landscape of the IPO market is bustling with new entries, it’s important to revisit the basics and analyze the two key components of an IPO utilised for fundraising i.e fresh issues and offers for sale (OFS), which are essential to every offering.
A fresh issue refers to the process of raising new capital, which can only be done by a company. In a fresh issue, the company issues new shares, and all proceeds from this fresh issue go to the company, resulting in an increase in the company’s share capital. The second type is an offer for sale, which involves the sale of existing shares held by various parties, including promoters and investors, such as private equity (PE) investors. Thus, there are three possible combinations: a purely fresh issue, a solely offer for sale, and a mixed issue that includes both an offer for sale and a fresh issue component.
Mohit Gulati, CIO and managing partner of ITI Growth Opportunities Fund explained that an OFS is like selling your old car – the ownership changes, but the company doesn’t get a rupee. A fresh equity issue, on the other hand, is like raising money to build a new garage – the company gets fresh capital for growth. In most IPOs, it’s a mix of both, but investors should always check who’s actually getting the money – the business or the early backers cashing out.
Current primary market trend
In recent times, companies have predominantly opted for the OFS route. The current IPO offering from Orkla India consists entirely of an OFS component, while the highly anticipated Lenskart Solutions IPO includes an OFS portion of ₹5,128.02 crore alongside a fresh issue of ₹2,150 crore. The upcoming Studds Accessories IPO, set to open tomorrow, is entirely OFS.
Talking about the present IPO market trends, Arun Kejriwal, the founder of Kejriwal Research and Investment Services, illustrated with an example that in the recent case of LG Electronics, the entire capital was owned by LG Korea, which did not require any additional fundraising because the company had sufficient resources. It has ample funds, and any routine capital expenditures they undertake are financed through internal accruals. Their sole intention was to be listed on the stock exchanges. To achieve this, they executed an offer for sale (OFS) component to become publicly traded. Consequently, they opted for an OFS.
The listing requirements stipulate that a company must conduct at least a minimum OFS if it wishes to be listed, rather than issuing new shares. This is because if the public does not own shares, the entity cannot be deemed a publicly listed company. Thus, a publicly listed company requires a portion of its shares to be held by the public. “Public” refers to individuals like you, me, and everyone else. It cannot be owned solely by individuals classified as promoters or private equity investors.
OFS – What does it mean for investors?
According to experts, an OFS enhances share liquidity in the market and does not reduce the company’s equity base. It also enables new investors, such as mutual funds and retail participants, to invest in the company, resulting in a more diverse and stable ownership structure.
Prashanth Tapse, Research Analyst, Senior Vice President of Research at Mehta Equities, explained that from an investor’s perspective, OFS issues are often priced at a discount of around ~2-10% to the current market price, offering a chance to buy quality shares at attractive valuations.
Overall, an OFS is a win-win for both the company and investors – it improves liquidity and governance for the company while giving investors a discounted entry without affecting the company’s capital structure.