When a company goes public through an Initial Public Offering (IPO), it offers shares to the public for the first time. But behind the simple idea of “issuing shares” lie distinct components that define how the capital is raised and where it goes. Three of the most critical concepts in any IPO structure are the Fresh Issue, the Offer for Sale (OFS), and the Total Issue Size. Each of these has a specific implication for the company’s balance sheet, existing shareholders, and investors entering the market.
Table of Contents
1. What Is a Fresh Issue?
A Fresh Issue refers to new shares that a company creates and offers to investors during the IPO. These shares are not previously existing; they are issued for the first time to raise capital for the business. The money raised from the sale of these newly issued shares goes directly to the company, thereby increasing its share capital and improving its liquidity position.
Key Characteristics:
- Purpose: To raise funds for expansion, debt repayment, working capital needs, or other corporate objectives.
- Result: Increases the total number of outstanding shares and consequently dilutes existing ownership.
- Impact on Balance Sheet: The proceeds appear under share capital and securities premium in the equity section, while the company’s assets increase by the amount of cash raised.
Example: Suppose Amagi Media Labs issues new shares worth INR 300 crore in its IPO. This INR 300 crore represents the Fresh Issue component — it’s new money flowing into the company.
2. What Is an Offer for Sale (OFS)?
An Offer for Sale (OFS) is when existing shareholders (promoters, private equity investors, or early backers) sell their stake to the public during the IPO. Unlike the Fresh Issue, no new shares are created. The money raised through an OFS goes directly to the selling shareholders, not to the company.
Key Characteristics:
- Purpose: Allows existing investors to partially or fully exit their holdings and realize profits.
- Result: No dilution in share capital since shares already exist; they simply change hands.
- Impact on Balance Sheet: The company’s balance sheet remains unaffected because it does not receive any funds from this component.
Example: If Amagi Media Labs’ promoters sell INR 200 crore worth of their existing shares as part of the IPO, that INR 200 crore is categorized as an Offer for Sale.
3. Total Issue Size in an IPO
The Total Issue Size refers to the aggregate monetary value of all shares being offered to the public in an IPO, regardless of whether they originate from a Fresh Issue, an Offer for Sale (OFS), or a combination of both. In other words, it represents the total amount investors will pay for all shares offered in the issue.
If the IPO consists only of a Fresh Issue, the Total Issue Size will equal the value of that Fresh Issue.
Similarly, if it comprises only an OFS, then the Total Issue Size will correspond solely to the OFS portion.
When both components are present, the Total Issue Size is the sum of the Fresh Issue value and the OFS value.
Formula:
Example:
- Case 1: Only Fresh Issue = INR 300 crore → Total Issue Size = INR 300 crore
- Case 2: Only OFS = INR 200 crore → Total Issue Size = INR 200 crore
- Case 3: Fresh Issue INR 300 crore + OFS INR 200 crore → Total Issue Size = INR 500 crore
Relevance:
- The Total Issue Size helps investors gauge the scale of the IPO and the potential liquidity the stock will have post-listing.
- It also determines the category-wise allocation (such as QIBs, NIIs, and Retail) and impacts regulatory thresholds for disclosure and minimum subscription.
4. Why the Distinction Matters
Understanding these components is essential because the source and destination of funds differ:
| Aspect | Fresh Issue | Offer for Sale (OFS) |
|---|---|---|
| Shares Created | New shares issued | Existing shares sold |
| Funds Go To | The company | Existing shareholders |
| Effect on Capital | Increases share capital | No change |
| Dilution | Yes | No |
| Purpose | Fund growth, repay debt, etc. | Provide exit to early investors |
From an investment standpoint, a high proportion of Fresh Issue often signals a growth-oriented IPO, while a heavily skewed OFS component may suggest investor exits rather than capital inflow to the business.
5. Practical Implications for Investors
- Valuation and Post-IPO Ownership: Fresh Issues increase the total number of shares, affecting Earnings per Share (EPS) and ownership ratios. Investors should factor in dilution when assessing post-IPO valuations.
- Use of Proceeds: Only the Fresh Issue funds enhance the company’s financial strength or business operations. Review the IPO’s Objects of the Issue section in the Draft Red Herring Prospectus (DRHP) to understand how the funds will be deployed.
- Exit Signal: A significant OFS component, especially by promoters, could indicate they are partially exiting the business. While not inherently negative, it requires analysis of management confidence and future growth outlook.
- Market Perception: Market participants often view IPOs with balanced Fresh Issue and OFS components more favorably — signalling both growth capital infusion and promoter commitment.
Conclusion
In summary, when analyzing an IPO, discerning between the Fresh Issue and the Offer for Sale is vital to understanding the real motive and financial impact of the listing. The Total Issue Size may give you the headline number, but the composition of that total reveals whether the company is primarily raising new funds for growth or providing exits for existing stakeholders.
A prudent investor, therefore, does not just look at the total valuation or the hype around the listing — but studies where the money is going, who is selling, and how the capital structure will look post-IPO.