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The Rising proportion of OFS
Oct 12, 2017

The initial Public Offering (IPO) activity is headed for a record in 2017. In the first nine months, the volume of IPOs has already exceeded the yearly total of 2016. In the first half of the current fiscal year, 19 companies garnered over Rs 267 billion through their respective IPOs. Compared to the same period in the last fiscal, this is much higher than the Rs 165 billion raised by 15 firms. The previous record was Rs 212 billion in the first half of 2007-08.

The IPO activity in FY17 is mainly driven by Offer for Sale (OFS) rather than fresh issues. An OFS is a route through which existing promoters and private equity investors offload their stake. Here, the money from the sale goes to the selling shareholder. Whereas, in a fresh issue, the money raised goes to the company, who, normally, utilizes this money for repaying debt, capital expenditure, etc.

As per Prime Database, in FY18, Rs 224.5 billion or nearly 85% of the IPO has been raised through OFS issuance. The increasing proportion of OFS can be clearly seen in the chart above.

One of the key reasons for this surge in OFS offering is due to a surge in the Indian equity market backed by liquidity and increasing investor demand for financial assets. Private equity investors and promoters are taking advantage of the absurd demand for IPOs.

With several big IPOs in the pipeline in the last few months of 2017, it looks like the OFS will dominate the IPO proceedings.

During such a time, it's beneficial to be very selective when investing in IPOs. Carefully analyse each company for its own merits and don't give in to the hype surrounding the public offering.

That's Ankit Shah's approach at Equitymaster Insider. He keeps a sharp eye on the developments in the IPO space and keeps his readers up-to-date on the big-ticket IPOs.

Ankit and his team of researchers constantly reference this handbook on investing in IPOs. You can download a copy for yourself. It's free. Just click here.

Data Source: Prime Database, Livemint

This Chart Of The Day was published in The 5 Minute WrapUp - A Grave Mistake Both Companies and Investors Make

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