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By IPOCheckr Editorial TeamLast reviewed
Most IPOs have two parts. In a fresh issue the company creates new shares and keeps the money. In an offer for sale (OFS) existing shareholders – promoters, private equity funds or early investors – sell some of their shares, and the money goes to them, not the company. The RHP's cover page and Objects of the Offer section show the split. Neither is good or bad on its own; what matters is who is selling, why and what the company does with its share.
New shares are created. Money goes to the company. Share count rises.
Existing shares change hands. Money goes to selling shareholders. Share count is unchanged.
RHP cover page, Offer Document Summary and Objects of the Offer.
As an applicant you cannot tell which part your allotted shares came from – they are identical.
In a fresh issue the company issues new shares. The money (after the company's share of expenses) reaches the company's bank account and must be used for the purposes listed in Objects of the Offer – for example repaying loans, building capacity, funding a subsidiary or general corporate purposes.
Because new shares are created, existing shareholders' percentage holdings are diluted, and per-share figures like earnings per share are calculated on a larger base after listing.
In an offer for sale, named shareholders sell existing shares to the public. The company does not receive this money. The selling shareholders, their number of shares and sometimes their average cost of acquisition are listed in the RHP.
SEBI's rules currently require shares offered for sale to have been held for at least one year before the draft offer document is filed, with limited exceptions. For companies listing under Regulation 6(2) – those that do not meet the profitability track-record tests – a shareholder with more than 20% of pre-issue capital can sell at most 50% of that holding in the OFS, and one with less than 20% can sell at most 10% of pre-issue capital.
OFS is also how early investors and employees with stock options often get liquidity. A large OFS does not by itself mean insiders are losing confidence; private equity funds have fixed lives and must exit at some point.
A company has 10 crore shares before its IPO. Promoters own 8 crore (80%) and a PE fund owns 2 crore (20%). The IPO has a fresh issue of 2 crore shares and an OFS of 1 crore shares – 0.5 crore from the promoters and 0.5 crore from the PE fund.
The fresh issue part comes with conditions designed to stop vague fund-raising.
The cover page states the total issue size and divides it into fresh issue and offer for sale, sometimes in rupees, sometimes in shares. The Offer Document Summary repeats the split and lists the selling shareholders. Objects of the Offer then breaks down the fresh issue proceeds by use.
Questions worth answering as you read:
After listing, fresh issue money appears in the company's balance sheet as cash, lower debt or new assets, and the quarterly monitoring agency report shows how much of each object has been spent. If the company wants to change how unspent proceeds are used, the Companies Act requires shareholder approval by special resolution, and the change is disclosed to the exchanges.
OFS money never appears in the company's accounts. The only lasting trace is the lower stake of the selling shareholders, visible in the shareholding pattern filed with the exchanges every quarter.
‘The company is raising ₹1,000 crore’ is often wrong when ₹700 crore of it is an OFS. Headline issue size includes both parts.
Market capitalisation at the issue price uses the post-issue share count, which includes new shares from the fresh issue. Price-to-earnings figures in the RHP's Basis for Offer Price section may use pre-issue or post-issue figures – check which.
A fresh issue used mainly to repay debt can still be useful: lower interest costs may improve profit. The point is to understand the purpose, not to prefer one structure.
Primary rules and official pages this guide was checked against. Rules change, so the official text always prevails.
General information, not investment advice. Rules set by SEBI, RBI and the exchanges can change, so confirm current limits with your broker or the offer document.