If you’ve ever wondered how companies like Zomato, LIC, or Paytm started trading on the stock market, or what terms like IPO, OFS, and FPO mean when you hear them in the news, you’re not alone.
These terms often sound intimidating to beginners—but they’re actually simple once you understand their purpose and process.
This guide will walk you through the differences between IPO, OFS, and FPO.
Whether you’re a business owner, salaried individual, freelancer, a mobile repair shop owner, a local bakery entrepreneur, or someone curious about investing in India, this article will explain how companies raise money from the public—and what it means for you as a small investor.
Let’s break it all down together, step by step.
Key Takeaways
- An IPO (Initial Public Offering) is when a company sells its shares to the public for the first time to raise money for growth or pay off debt.
- A Rights Issue lets current shareholders buy more shares at a discount, giving them a chance to invest more before new investors.
- An OFS (Offer for Sale) is when company promoters sell their existing shares to the public, without creating new shares.
- An FPO (Follow-on Public Offer) is like a second IPO where a listed company issues new shares to raise more funds from the public.
- Understanding IPO, OFS, Rights Issue, and FPO helps beginner investors make better decisions when companies raise money or offer discounted shares.
What is an IPO? – The First Public Step of a Company
What does IPO mean? IPO (Initial Public Offering) is when a company offers its shares to the public for the first time. It’s like opening the gates of a gated society and inviting everyone to own a piece of it.
Think of a small manufacturing unit that has grown steadily over the years. Now it wants to expand its factory, invest in better machinery, or repay earlier loans. Instead of borrowing more from banks, the company decides to go public—offering a portion of its ownership (shares) to the general public through the stock exchange.
Why do companies go for an IPO?
- To raise capital for expansion projects or future growth
- To allow early investors or founders to exit partially and take profits
- To increase visibility and credibility in the market
Once listed, the shares of the company can be bought and sold in the secondary market (like NSE or BSE), and the company becomes accountable to its public shareholders.
What Happens After the IPO?
Even after a successful IPO, companies may still need additional funds. There are three common methods to raise more capital:
- Rights Issue
- OFS (Offer for Sale)
- FPO (Follow-on Public Offer)
Let’s go over each one with simple explanations and practical examples.
Rights Issue – Raising Funds from Existing Shareholders
What is a Rights Issue? A Rights Issue is when a company offers new shares to its existing shareholders—usually at a discount to the current market price. It’s like telling current owners, “You helped us reach here. Do you want more shares at a lower price before we ask anyone else?”
The shares are offered in a specific ratio.
For example, a 1:4 rights issue means that for every 4 shares you own, you get the right to buy 1 new share.
Example
Let’s say you’re an online seller and have invested in South Indian Bank shares. The bank announces a rights issue at ₹14 per share when its market price is ₹20. If you hold 300 shares, and the issue ratio is 1:3, you can buy 100 more shares at a 30% discount.
Pros and Cons
- Pros: Discounted price; preference to existing investors
- Cons: Only current shareholders can apply; share dilution may reduce value temporarily
When a company issues more shares, it can reduce the value of existing shares unless earnings grow faster than dilution. Always check the purpose of the rights issue before applying.
OFS (Offer for Sale) – Selling Promoter Shares to the Public
What is an OFS? OFS (Offer for Sale) is when the promoters of a company sell some of their existing shares to the public, usually to meet SEBI’s minimum public shareholding norms or reduce promoter stake. No new shares are created—just existing ones are transferred.
Imagine a mobile repair shop that becomes so successful it grows into a nationwide chain. After listing through an IPO, the promoter wants to reduce his ownership slightly, maybe to bring in more public participation or comply with regulations. He does this through an OFS.
How does OFS work?
- Stock exchanges provide a special window for OFS transactions
- There is a floor price (minimum price per share)
- Investors can bid online through brokers
- Shares are allotted at or above the cut-off price, and settled in T+1 days
Also Read: How the Settlement Cycle Works in the Indian Stock Market
Example: NTPC Ltd offered 46.35 million shares through OFS at a floor price of ₹168. The offer was held on two days—one for non-retail investors and one for retail.
Key Difference from Rights Issue
Unlike a rights issue, an OFS is open to everyone in the market, not just existing shareholders.
OFS is a good opportunity to buy shares of large government companies (like PSUs) at a potentially lower price—but always check fundamentals first.
FPO (Follow-on Public Offer) – Like an IPO, but Second Time Around
What is an FPO? An FPO (Follow-on Public Offer) is when a company that is already listed on the stock exchange issues new shares to the public to raise more funds—just like an IPO, but not the first time.
Let’s say a local bakery chain went public five years ago and now wants to raise more money to launch new outlets in other cities. It can do an FPO by issuing fresh shares to both existing and new investors.
Key Features of an FPO
- Fresh shares are created, diluting existing equity
- Draft Red Herring Prospectus (DRHP) needs SEBI approval
- A price band is set, and investors can bid
- After 3–5 days of bidding, the cut-off price is declared, and shares are allotted accordingly
Example: Engineers India Ltd held an FPO in February 2014, offering shares at ₹145–₹150 when the stock was trading at ₹151.1. It was oversubscribed 3 times, indicating high demand.
Why are FPOs rare now?
Since OFS is quicker and requires fewer formalities, companies prefer OFS over FPO these days. But when a company wants to raise fresh capital (not just sell promoter shares), FPO is still a valid option.
IPO vs OFS vs FPO – At a Glance
| Type | New Shares Created? | Purpose | Who Can Buy? |
| IPO | Yes | Go public & raise capital | General Public |
| OFS | No | Promoter selling shares | General Public |
| FPO | Yes | Raise fresh funds post IPO | General Public |
| Rights Issue | Yes | Raise funds from existing investors | Only Existing Shareholders |
Final Thoughts
As a small investor or Indian business owner looking to understand the stock market, knowing these tools helps you:
- Spot opportunities to buy good companies at discounted prices
- Understand why prices move when new shares are issued or promoters sell
- Build confidence in navigating financial news and investing wisely
Next time you hear “this company is launching an OFS” or “Rights Issue opens next week,” you’ll know exactly what it means—and how it might affect your investment decisions.
Always check if the funds raised in an IPO, OFS, or FPO are for growth or debt repayment. This helps you judge the future potential of the company.
