Do promoters sell their shares or issue new shares in an IPO?

When a company decides to go public, many investors wonder whether the IPO involves promoter share sale vs new share issuance. Understanding this distinction is key to assessing both risk and potential value before investing.

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An IPO can comprise two types of shares: fresh issue shares and offer for sale (OFS) shares. Fresh issue shares are newly issued by the company to raise funds for expansion, debt repayment, or other corporate purposes. In this case, promoters typically do not sell their existing shares, and the money raised goes directly to the company.

On the other hand, an offer for sale involves promoters or existing shareholders selling a portion of their stake to the public. In such cases, the proceeds from the sale go to the sellers, not the company. This allows promoters to diversify holdings, provide liquidity, or unlock value from their existing investment. Many IPOs are a mix of both fresh issue and OFS, balancing company fundraising requirements with the promoter participation.

Understanding types of IPO shares offered is important for investors. Fresh issues generally indicate that the company is looking to raise capital for growth, while OFS shares might suggest promoters are partially exiting. Neither is inherently bad, but it’s useful to know the breakdown to gauge the company’s intentions and post IPO equity structure.

Promoters’ decisions also depend on regulatory and market factors. Oversized promoter sales may affect investor perception, potentially impacting demand and listing day performance. Conversely, a purely fresh issue often signals confidence in the company’s growth story. Knowing how promoters participate in an IPO allows investors to make informed decisions rather than relying solely on hype.

In summary, IPOs can involve new shares issued by the company, existing shares sold by promoters, or a combination. By reviewing the IPO prospectus carefully, investors can identify which type of shares are on offer and assess the implications for valuation, risk, and future growth potential. This knowledge ensures that investment decisions are strategic, informed, and aligned with personal financial goals.