- Summary
- A secondary offering is a further public sale of shares after a company is already listed, involving new shares, existing shares, or both.
- A non-dilutive offering, such as an OFS, transfers existing shares without increasing shares outstanding, whereas a dilutive offering creates new shares and can reduce existing shareholders’ percentage ownership.
- In India, investors should distinguish between a fresh issue and an OFS because fresh-issue proceeds go to the company, whereas OFS proceeds go to the selling shareholders.
- Vodafone Idea’s ₹18,000 crore FPO in April 2024 created 16,36,36,36,363 new equity shares at ₹11 per share, showing how a follow-on offering can raise capital while changing ownership structure.
What is a Secondary Offering IPO?
A secondary offering is a subsequent public sale of shares by a company that has already listed its shares on a public market; it is often referred to as a secondary public offering, a follow-on offering, or a further public offer.
In India, there is a significant difference between a fresh issue and an offer for sale (OFS): in the case of a fresh issue, the company produces and issues new shares and the money obtained goes to the company; in an OFS, the existing shareholders sell the shares which they already hold and therefore the funds go to the shareholders who are carrying out the sale rather than to the company.
It therefore does not follow that a secondary offering implies the company is raising new capital.
For example, imagine that a company which is listed has 10 lakh shares and one of its early investors holds 2 lakh shares; if that investor decides to sell 50,000 of his shares to the general public, the shares are transferred from the original investor to the new shareholders, and the company does not get the proceeds from the sale.
The term ‘secondary public offering’ is therefore useful when talking about additional public share sales following an IPO. Yet investors should always review the offer documents to determine whether the transaction involves a fresh issue, an offer for sale, or both.
How Does a Secondary Offering Work?
A secondary offering follows a structured process that determines who is selling the shares, how investors can participate and how the shares are eventually listed or credited. The exact process can vary depending on whether the offering involves a fresh issue, an Offer for Sale (OFS), or another type of follow-on offering.
- The company or existing shareholders decide to sell shares
The offering may be initiated by the company to raise additional capital or by existing shareholders who want to sell part of their holdings. The structure determines whether new shares are created or existing shares are transferred. - The offering details are announced
Key details such as the number of shares offered, the issue or offer price, the price band, where applicable, the eligibility criteria, and the offer period are disclosed to investors. The disclosures also provide information about the purpose of the issue and other relevant terms. - Investors submit their applications or bids
Eligible investors can apply during the specified offer period. Depending on the type of offering, the bidding and application process may differ. Investors must follow the applicable rules and submit their bids through the permitted channels. - Shares are allotted or transferred
After the offer closes, shares are allotted to successful applicants according to the applicable allocation process. In a fresh issue, newly issued shares are allotted to investors, whereas in an OFS, existing shares are transferred from selling shareholders to investors. - The shares are credited and become available for trading
Once the allotment and settlement process is completed, the shares are credited to investors’ demat accounts. Where applicable, the shares are subsequently listed or admitted for trading on the stock exchange according to the relevant procedures.
Types of Secondary Offerings Investors Should Know
Secondary offerings can broadly be classified as non-dilutive or dilutive, depending on whether new shares are created as part of the offering.
1. Non-Dilutive Secondary Offering
A non-dilutive secondary offering involves the sale of shares that are already outstanding. No new shares are created, so the total number of shares outstanding does not increase. An Offer for Sale (OFS) is an example in which existing shareholders, such as promoters or other eligible shareholders, sell their holdings to investors. The proceeds from the sale generally go to the selling shareholders rather than the company.
2. Dilutive Secondary Offering
A dilutive secondary offering involves the company issuing new shares to raise additional capital. Since the number of shares outstanding increases, existing shareholders’ percentage ownership may decrease if they do not participate in the offering. A Follow-on Public Offering (FPO) can include a fresh issue of new shares and is therefore dilutive when new shares are issued.
3. Combination of Dilutive and Non-Dilutive Offering
Some offerings combine a fresh issue of new shares with an Offer for Sale of existing shares. The fresh issue increases the total number of shares outstanding and can dilute existing shareholders, while the OFS portion does not create new shares. The funds raised through the fresh issue go to the company, while proceeds from the OFS go to the shareholders selling their shares.
Secondary Offering vs IPO: Key Differences Explained
Both an IPO and a secondary offering enable investors to buy shares through the public market, but they occur at different stages in a company’s development.
An IPO represents the first time a company offers shares to the public. It occurs before the company’s shares begin trading publicly. In an IPO vs SPO comparison, the key difference is that an IPO occurs when a company first becomes publicly listed, whereas an SPO occurs after the company is already publicly traded.
So, what is SPO in stock market terms? A Secondary Public Offering (SPO) generally refers to an offering of shares after a company is already listed. Depending on the structure, it may involve existing shareholders selling shares, the company issuing additional shares, or a combination of both.
| Feature | IPO | Secondary Offering |
| Timing | Before or at initial listing | After the company is already listed |
| Seller | Company and/or existing shareholders | Company and/or existing shareholders |
| New shares | May be issued | May or may not be issued |
| Use of proceeds | Depends on fresh issue/OFS structure | Depends on the type of offering |
| Existing shareholders | May be diluted if new shares are issued | May be diluted if new shares are issued |
| Market status | Company is entering the public market | Company is already publicly traded |
Therefore, the terms IPO and SPO can be misleading if used as exact equivalents, since a secondary public offering is not just another IPO, as the company is already listed.
Why Companies Launch Secondary Offerings and What It Means for Investors
Companies and their current shareholders might have different motives for conducting a secondary offering.
A firm can raise additional capital by issuing new shares to finance expansion, pay off debt, increase working capital, or meet other business aims as mentioned in the prospectus.
Current shareholders have the option to sell some of their shares to reduce their overall holdings, realise a portion of their investment, or increase the number of shares available to the general public.
For investors, it is important to know the reason for the offering; if new shares are being issued, then investors should look into how the company intends to use the money received; and if existing shareholders are selling, investors might wish to find out who is selling and what part of their holding is being offered.
The fact that an existing shareholder makes a large sale does not necessarily indicate that the company is doing poorly, and likewise, a new issue does not automatically mean that the company will perform well. To determine this, investors must look at the company’s financial position, valuation, business plans and the stated purpose of the offering.
Benefits, Risks, and Common Mistakes When Investing in Secondary Offerings
Investors can obtain shares in a company that is already listed through secondary offerings. Unlike in the case of an IPO, they generally have the opportunity to review the company’s prior trading record, financial results, and public disclosures.
A further possible advantage is that shareholders can buy more shares when a current shareholder reduces their holding. Also, an OFS can increase the number of a company’s shares that are held by the general public.
However, risks remain.
New shares being issued could dilute existing shareholders, and since the share price may change following the offering, investors must also consider market risk.
Another important factor to consider is valuation. The fact that a secondary offering takes place does not mean that shares will be available at a good price. Investors should, where appropriate, compare the offer price with the company’s financial performance, valuation and market price.
Common mistakes include:
- Assuming each secondary offering indicates company growth.
- Not considering who receives the money resulting from the sale.
- Focusing solely on the offer price without considering valuation.
- Not verifying whether new shares are being issued.
- Considering past share price performance as a guarantee of future returns.
- Disregarding the company’s financial statements and offer documents.
How a secondary offering in an IPO works?
The phrase “secondary offering in an IPO” generally refers to existing shareholders selling some of their shares as part of the IPO, rather than to a secondary offering conducted after listing.
For example, suppose an IPO comprises 10 lakh shares, of which 6 lakh are newly issued, and 4 lakh are existing shares offered for sale.
- The proceeds from the 6 lakh fresh shares go to the company.
- The proceeds from the 4 lakh OFS shares go to the selling shareholders.
- Both portions form part of the IPO through which the company becomes publicly listed.
After the company is listed, any subsequent public offering is dealt with separately as a post-IPO transaction.
Impact of Secondary Offerings on the Market
A company’s share price and ownership structure can be affected by a secondary offering, though the actual market reaction will depend on several factors.
If the current shareholders sell a large number of shares, the increased supply might affect trading activity, and investors could also take notice of who the shareholder is and how large the stake sold is.
When a new issue of shares is made, the total number of shares already outstanding will rise. As a result, indicators such as earnings per share may be affected since the company’s earnings will now be distributed among a greater number of shares.
The money obtained could be put towards business expansion, paying down debt, or another corporate purpose. The impact, therefore, depends in part on how the company uses the capital.
There is no definitive rule stating that a secondary offering will cause the stock price to rise or fall; market participants’ reactions depend on the company’s valuation, financial performance, the offer price, investor sentiment, and the reason for the issue.
Real-World Example of a Secondary Offering IPO
A real-world example of a dilutive follow-on offering is Vodafone Idea Limited’s ₹18,000 crore Further Public Offer (FPO) in April 2024. Unlike a typical secondary offering, where existing shareholders sell their shares, Vodafone Idea issued new equity shares to raise capital. This increased the total number of shares outstanding, potentially diluting the ownership percentage of existing shareholders who did not participate in the offering. Vodafone Idea’s annual report records the FPO shares as an increase in its issued share capital.
This example shows how a follow-on offering can help a listed company raise additional capital while also changing its shareholding structure. For investors, key factors to examine include the number of new shares issued, the issue price, the purpose of the funds raised and the potential effect on existing shareholders.
For investors, the key questions would be:
- Then who is the one selling the shares?
- The number of shares being offered is what?
- How much is the offer price?
- What kind of transaction is it: an OFS, a FPO, or some other type of public offer?
- Does the company get any of the proceeds?
- What impact would the transaction have on the public shareholding?
The key point is that investors ought to understand the structure of the offering rather than assuming that each additional share sale means the company is receiving new capital.
How Investors Can Evaluate Secondary Offerings + Next Steps
Before carrying out a secondary offering, beginners can use a simple checklist.
1. Understand the offer structure
Start by determining if the offering involves a fresh issue, an OFS, or both—this will show you where the money raised will go.
2. Check the purpose of the issue
To find out about the latest issue, you should look into how the company intends to use the funds; the stated purpose will give some context for the capital being raised.
3. Examine the financials
Examine the revenue, profits, debt, the cash flows and any other financial information that is relevant. It is better to compare the company’s most recent performance rather than basing your assessment on a single year.
4. Check the valuation
When comparing the offer price with relevant valuation measures and the company’s listed market price, where applicable, note that a lower offer price does not necessarily mean the investment is attractive.
5. Understand dilution
When new shares are issued, check the effect that this could have on the total number of shares and the existing percentages of ownership.
6. Read the offer documents
The information relating to the issue, the risks, the financial details, the selling shareholders and the use of the proceeds is included in the company’s offer documents. Investors can access public-issue and offer-document resources provided by NSE and SEBI.
Once these factors have been considered, investors will be able to judge whether the offering matches their investment goals and risk tolerance.
Conclusion
A secondary offering is a further public sale of shares by a company already listed on public markets, or by its existing shareholders; it can take the form of an offer for sale, a new issue, a fresh public offer, or a combination of these methods.
For people who are just starting out, the main thing to do is to find out who is selling the shares and where the money is going; in the case of an OFS, the money generally goes to the shareholder who is selling the shares, whereas with a new issue the proceeds go to the company.
By understanding the offering structure, the valuation method, the company’s financial position, potential dilution, and how the proceeds will be used, investors can examine the secondary offering more carefully.
FAQs
That is not automatically the case. The effect will vary depending on factors including the offer price, the company’s fundamentals, the type of offering, the valuation, and how the proceeds will be used.
Stock prices may rise or fall depending on market conditions, investor demand, the offering price, the company’s fundamentals, and the size and structure of the offering. There is no guarantee of a particular price reaction.
Retail investors can participate in eligible public offerings as long as a retail category is available and they meet the relevant requirements. The rules in this situation will vary depending on the type of offering.
A secondary offering is a general term for a subsequent sale of publicly traded shares following the initial offering, while a follow-on public offering (FPO) is a specific type of further public offering made by a company that has already carried out an IPO.
No, a proposal to sell involves the transfer of the shares already outstanding and does not result in any new shares being created. Dilution usually occurs when a company emits further shares.
People can begin by finding out how fresh issues and OFS function, then go on to look at offer documents, financial statements, valuation and dilution. Looking at these factors in a number of different offerings will help to gain a practical understanding.
