OFS vs IPO
An Offer for Sale (OFS) within an IPO structure is the component through which existing shareholders (promoters or pre-IPO investors) sell their shares to the public, while the fresh issue (FI) component is the component through which the company raises new capital by issuing new shares; the two components may co-exist in an IPO, and their relative sizes determine whether the IPO primarily benefits the company or the selling shareholders.
An IPO in India can comprise two distinct components: a Fresh Issue (FI) and an Offer for Sale (OFS). These two terms have specific technical meanings in the ICDR framework that differ from the colloquial usage of 'OFS' as an exchange-based secondary sale mechanism (which is a separate product used by listed company shareholders). In the context of an IPO, OFS and FI together constitute the 'public issue.'
A Fresh Issue involves the company creating and selling new shares to the public. The proceeds from a fresh issue go directly to the company's treasury and are used for the 'objects of the issue' disclosed in the offer document — typically funding capital expenditure, repaying debt, funding acquisitions, or meeting working capital requirements. A fresh issue dilutes the existing shareholders (including promoters) by increasing the total number of shares outstanding.
An Offer for Sale (in the IPO context) involves existing shareholders — typically promoters, private equity investors, or venture capital funds — selling their pre-existing shares to the public. The proceeds go to the selling shareholders, not to the company. An OFS in an IPO does not create new shares, does not dilute the existing proportional ownership of shareholders who do not sell, and does not add capital to the company's balance sheet. It is purely a liquidity and monetisation event for the selling shareholders.
The balance between the fresh issue and OFS components is a significant consideration for prospective investors evaluating an IPO. An IPO that is predominantly OFS-heavy raises a legitimate question: if the company's prospects are as strong as the offer document suggests, why are the insiders selling? While there are perfectly legitimate reasons for promoters and PE funds to partially monetise (fund lifecycle exits, estate planning, portfolio diversification), a large OFS component — particularly where promoters are reducing their stake significantly — can signal that insiders believe the offered price is full or fair relative to their assessment of the company's prospects. Conversely, a large fresh issue component signals that the company itself needs capital to grow, which can be interpreted as a sign of expansion ambition.
For capital gains tax purposes, sellers in the OFS component (pre-IPO investors) crystallise capital gains at the IPO allotment price, with the gains classified as long-term (taxed at 12.5% for listed securities, post-Budget 2024) or short-term (taxed at 20%) based on how long they held the shares before the IPO.