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The first thing I look at when a new IPO is announced is not the GMP, not the subscription tracker, not the listing day prediction. It is the OFS versus fresh issue split. This one number tells you a lot about what is actually happening with the money you are putting in.
What Fresh Issue Means
A fresh issue is exactly what it sounds like. The company is issuing new shares to the public and using the money raised for its own purposes, expanding capacity, paying down debt, funding acquisitions, building working capital, or whatever the stated objects of the issue are. The money comes in, the company’s balance sheet strengthens, and the total share count increases.
This is capital formation in the traditional sense. A growing company needs money to grow, it goes to the public market to raise it, and in exchange gives up a portion of ownership. This is the original and honest purpose of an IPO.
What OFS Means
OFS stands for Offer for Sale. Here, existing shareholders, founders, promoters, private equity funds, venture capital investors, early angel investors, are selling their existing shares to the public. The shares change hands, but the company receives nothing. The total share count stays the same. The money goes straight to the selling shareholders’ pockets.
There is nothing inherently wrong with this. PE and VC investors have a lifecycle, they come in early, take risk, and eventually need liquidity to return money to their own investors. An IPO is a natural exit point. But you, as an incoming investor, are essentially buying from someone who wants out. That is a different transaction than buying into a growing company that needs your capital.
Why the Ratio Matters
When an IPO is entirely or predominantly OFS, say 80% or more of the issue is OFS, the company is not raising meaningful new capital. It is primarily a liquidity event for existing shareholders. The company’s business, its balance sheet, its future capex plans, none of that is being funded by your application money.
This does not make the IPO bad automatically. If the business is great, the valuation is reasonable, and you want to own a piece of it, you can still buy in. But go in with clear eyes. You are not funding their growth. You are buying from someone who decided now is a good time to sell their stake.
The question I always ask: why is the promoter or investor selling now? Sometimes the answer is benign, a PE fund has held for eight years and needs to return capital to LPs. Sometimes the answer is less comfortable, the business has peaked, growth is slowing, and the insiders know the window to get a high valuation is closing.
Reading the Objects of the Issue
For the fresh issue portion, the DRHP has a section called Objects of the Issue or Use of Proceeds. This lists exactly what the company intends to do with the money it raises. I spend time here. The quality of this section varies dramatically.
A good use-of-proceeds section is specific: build Plant X with ₹Y crore, retire Term Loan Z with ₹W crore, fund working capital with ₹V crore. You can track this after listing, did they actually spend the money on what they said? SEBI requires companies to report on this in their annual reports for several years after listing.
A vague use-of-proceeds section, full of language like “general corporate purposes” without specific breakdowns, is a yellow flag. It suggests either the company does not have a clear plan, or the clear plan is not one they want to put in writing.
This connects to reading the DRHP more broadly. I have written a more detailed piece on what is a DRHP and which sections actually matter, the use of proceeds section is one of the four I always read.
A Quick Comparison
To make this concrete: if a company raises ₹1,000 crore in its IPO and ₹700 crore is OFS and ₹300 crore is fresh issue, then ₹700 crore goes to the sellers and only ₹300 crore comes to the company. The company’s balance sheet improves by ₹300 crore, not ₹1,000 crore. Your money, largely, is going to the exit of early investors.
Contrast this with an IPO that is entirely fresh issue, every rupee raised goes to the company for its stated purpose. This is a company that is growing, needs capital, and is willing to dilute existing shareholders to get it. That alignment, the company needs you and will use your capital productively, is a more straightforward starting point.
The Promoter Selling Signal
When the promoter, not just a PE fund, but the actual founder or founding family, is a large part of the OFS, I sit up and take notice. Promoters building a great business typically want to hold as much equity as possible. They sell when they need personal liquidity, when they want to diversify their own wealth (which is rational), or when they see that the current valuation is as good as it is going to get for a while.
All three are understandable. But as an incoming investor, you should at least know this is happening. The promoter’s post-IPO shareholding is disclosed in the DRHP. If they go from 70% to 35% in one IPO, they have sold a lot. That is worth understanding in the context of why.
Thinking about this reminds me of the broader investing principle I wrote about in the envy piece, we often focus on the sizzle (GMP, subscription numbers, listing day buzz) and miss the fundamental question of who is actually on the other side of the trade and why.
Frequently Asked Questions
What is an OFS in an IPO?
OFS stands for Offer for Sale. Existing shareholders sell their shares to the public. The proceeds go to those shareholders, not the company. The company’s capital and share count are unchanged.
Is a high OFS always a red flag?
Not always. PE and VC exits are part of the normal investment cycle. The concern is heavy promoter selling combined with minimal fresh issue, especially when the company does not have a compelling use-of-proceeds plan. Context matters more than the raw percentage.
How do I find the OFS vs fresh issue split?
It is stated clearly in the DRHP and the final prospectus, in the section on Issue Structure or Issue Details. Any IPO review worth reading will also highlight this number.
Practical takeaway: Before applying to any IPO, check the OFS versus fresh issue split and read what the company intends to do with the fresh issue money. These two data points tell you more about the real purpose of the IPO than any GMP figure.
This post is for educational purposes only. It is not financial advice. Mohit Mehra is not a SEBI registered investment advisor. Please consult a qualified financial advisor before making investment decisions.