A complete guide on IPO, FPO, OFS, and Rights Issue of Shares

Confused between IPO, FPO, OFS, and a Rights Issue of Shares. Walk through our detailed guide to know everything about IPO, OFS, FPO, and RI. The guide compares all of these 4 issues on multiple facets like nature of the company (listed or unlisted), need of the issue, fresh issue of shares, effect on dilution of ownership, share capital, earnings per share (EPS), and much more.

Before we proceed, let's first understand the meaning of IPO, FPO, OFS, and Rights Issue.

IPO - Initial Public Offering

When an unlisted company offers its shares for the first time to the public, it is called IPO. Companies launch IPO to raise funds for various objectives such as business expansion, pay-off lenders, capital expenditures, or working capital requirements.

In an IPO event, the company gets listed on the exchange (BSE or NSE) and becomes a publicly traded company. IPO is launched in the primary market and after listing, the company’s shares are bought and sold in the secondary market on the respective stock exchange.

Example

Tata Technologies launched IPO of Rs 3042 Cr in November 2023. The public issue was offered for Rs 500 per share and the company’s shares got listed at Rs 1200 on BSE and NSE. Know more.

Current IPOs in India

After the listing of shares, if the company needs more capital it can offer FPO and Rights Issue of shares.

RI - Rights Issue of Shares

Rights Issues is a way to raise capital from existing shareholders. A publicly traded company can offer additional rights shares in proportion to their current shareholding. Thus, the company offers the right to existing shareholders to buy more shares at a discounted price to the current market price of shares.

Every right issue have a record date and to be eligible to participate in the rights offer, one must have company’s shares in the demat account by the Record Date.

Example

The country’s oil-to-telecom giant Reliance Industries Ltd (RIL) has offered the largest Right Issue ever of Rs 53,125 Crore. The existing shareholders at that time was offered rights shares in 1:15 ratio means 1 share is offered for every 15 shares owned by shareholders by the record date, 10 November 2021.

The rights shares are offered at a price of Rs 1257 per share whereas the market price of shares as on record date was nearly Rs 2,500. Eligible investors may or may not apply for the rights shares. If they do not apply they can either sell their rights entitlement or let it expire.

Know more on the Rights Issue of Shares

Current Rights Issues in India (Link)

FPO – Follow on Public Offering

FPO is similar to IPO but the difference is IPO is a first-time issue of shares whereas FPO is additional or secondary offering of shares by an already listed company. A listed entity can sell more shares to the public via FPO to raise funds.

FPO may or may not dilute company’s ownership (dilutive FPO or non-dilutive FPO). In dilutive FPO, the company makes fresh issue of shares which increases the number of outstanding shares and dilute ownership whereas in non-dilutive FPO, promoters or owners sell their holdings.

Example

Vodafone Idea FPO was announced in April 2024 at a price of Rs 10-11 per share and the FPO was listed at Rs 11.8 on the NSE and Rs 12 on the BSE. Know more

OFS – Offer for Sale

OFS is different from IPO, FPO, and RI as Offer for Sale (OFS) serves as an exit route for company’s promoters. In OFS, promoters of the public companies make an offer to sell their shareholdings either partially or completely. Unlike RI which is offered to existing shareholders, OFS allow promoters to sell their stake to the public.

OFS is offered at a floor price and interested applicants (retail and non-retail) can bid for OFS at or above the floor price.

Example

Coal India OFS was announced in June 2023 to offload 3% government stake in the company. The IPO has received strong response from both the institutional and non-institutional investors. The floor price of the OFS was Rs 225 per share and the allotment was done at Rs 226 per share.

Dilution of Ownership

Dilution also popular as ownership dilution or equity dilution means reduction in existing shareholder’s ownership rights. Whenever a company makes fresh issues of shares, it dilute ownership. When additional shares are offered, it increases the number of outstanding shares and reduces the current ownership percentage of existing investors.

Let’s understand how dilution happens with an example. Suppose a company has 100,000 shares currently in the market with 10 investors each holding 10,000 shares.

Total shares in the market: 100,000 shares

Existing investors = 10, each having 10,000 shares

Existing shareholders stake = 10,000/1,00,000 = 10% ownership stake

Now, suppose a company issues further 25,000 shares in the market via FPO to raise capital, and a new investor buys them all. How will it affect company’s ownership structure?

Additional issue of shares = 25,000

Total shares in the market = 100,000 + 25,000 = 125,000

Total number of investors/shareholders = 11

New investor’s stake = 25,000/125,000 = 20% stake

Existing investor’s stake = 10,000/125,000 = 8% stake

Thus, it is clear that as new shares were offered, ownership gets diluted with new investors having 20% stake while the existing shareholders proportionate stake gets reduced to 8%.

Stake Dilution in IPO, FPO, OFS, and RI

Let's understand how dilution of ownership happens in IPO, FPO, OFS, and Rights oOffering.

Ownership dilution in IPO

A company can make public issue of shares via fresh issue or Offer for Sale or both. Let’s understand both in brief:

In fresh issue, new shares are issued which increases the number of outstanding shares and share capital and dilutes ownership. However, in Offer for Sale, company’s promoters sell their shares to the public so number of outstanding shares does not get affected resulting in no dilution.

Equity dilution in FPO

FPO is the secondary offering of shares in the market which again can be dilutive FPO or non-dilutive FPO.

Dilutive FPO dilute ownership stake because additional shares are offered in the market whereas non-dilutive nature of FPO does not result in ownership dilution because the promoters or owners sell their holdings.

Stake dilution in OFS

OFS is the process of selling existing shares held by promoters thus, no dilution of ownership takes place. The company’s share capital and EPS also not get affected or remain unchanged.

Dilution of Ownership in Rights Issue

Rights issue result in dilution because the company offers additional shares to the shareholders in proportion to their current shareholding. So the number of shares and share capital increases in line with the right issue proportion whereas earnings per share (EPS) declined.

As rights shares are offered at a discount so the cost of each share will decrease for shareholders who have applied for the rights issue.