Offer for Sale (OFS) allows existing shareholders, typically promoters or large investors, to sell their stake in a listed company directly to the public through the stock exchange. Unlike an IPO—where new shares are issued—OFS involves the sale of existing shares.
Also, it influences stock prices and market liquidity. This blog will explore the OFS process, its advantages and disadvantages, and how it differs from other fundraising methods. Read along!
What is OFS?
An Offer for Sale (OFS) is a streamlined method for listed companies to sell shares through a stock exchange platform. Introduced by the Securities and Exchange Board of India (SEBI) in 2012, it allows promoters and large shareholders to reduce their holdings efficiently. In an OFS, the seller sets a floor price, and investors bid for shares during a brief auction.
Features of offer for sale (OFS)
OFS offers a quick and efficient way to comply with public shareholding norms while providing investment opportunities to various market participants. Here are the key features of an OFS:
- Reserved Allocations: 25% for institutional investors, 10% for retail investors, often with discounts.
- Time-Bound: One-day event with two-day advance notice to exchanges.
- Investor Safeguards: There is a 25% cap on single-bidder allocation (except mutual funds). Retail offers are fully hedged.
- Flexibility: Sellers can choose not to sell if bids are unsatisfactory.
Rules and regulations in an OFS
Offer-for-sale transactions are subject to specific rules and regulations set by the SEBI to ensure fair and transparent practices. Let’s explore the key rules that shape OFS transactions in India:
SEBI Guidelines
Companies must obtain approval from SEBI and comply with stock exchange regulations before initiating an OFS. This includes filing the offer document with the exchanges for their review and approval and ensuring all necessary information is provided to potential investors.
Eligibility Criteria
OFS is not available to all listed companies. Only those ranked among the Top 200 by market capitalisation in the equity market are eligible to conduct an OFS.
Disclosure Requirements
Transparency is crucial in an OFS. Promoters and companies must disclose all material information related to the offer. This includes details such as the total number of shares offered, the floor price, and any other relevant information that could impact an investor’s decision.
Pricing Mechanism
The OFS pricing process is designed to be fair and market-driven. Share prices are determined through a transparent bidding process conducted on the stock exchange platform. Interested investors specify the number of shares they wish to buy and the price they’re willing to pay, allowing for a competitive and open-price discovery process.
Who can invest in an OFS?
An OFS is open to both retail and institutional investors.
- Retail investors are typically individual buyers with a bid value not exceeding Rs 2 lakh.
- Institutional investors include mutual funds, insurance companies, and foreign investors.
However, the specific eligibility criteria and allocation percentages can vary between different OFS events.
How does OFS work?
An OFS is a streamlined process for selling shares of a listed company. Here’s how it typically unfolds:
- Announcement: The promoter announces the OFS and the floor price to the stock exchange. This sets the minimum price at which investors can bid for shares.
- Bidding: During the specified bidding period, investors submit their orders. They can place bids at or above the floor price, indicating the number of shares they wish to purchase and at what price.
- Allocation: After the bidding period closes, the seller evaluates all bids received. Shares are then allocated to successful bidders based on the prices offered and the number of shares requested.
- Settlement: Successful bidders receive allocated shares in their Demat accounts, while the corresponding payment is debited from their linked bank accounts.
If bids fall below the floor price, the seller may choose not to proceed, and the OFS would be considered unsuccessful. In this case, the shares remain with the seller.
How to bid and apply for an OFS?
Here is a step-by-step guide on how to buy and apply for an OFS:
- Account Setup: Ensure you have both a demat and trading account.
- Eligibility Check: To be eligible for the OFS, retail investors’ overall bid value shouldn’t exceed Rs 2 lakh.
- Bidding Process: Log into your online trading portal or contact your dealer for offline bidding. Place your bid at or above the floor price set by the seller. Specify the number of shares you want and the price you will pay. No additional documents are required for bidding.
- Bidding Options: You can bid at a specific price or choose the cut-off price option to apply without specifying a price.
- Timing: Monitor the bidding window and place your order within the specified timeframe.
- Allocation: Shares may be allocated through single or multiple clearing prices. In a single clearing, all investors receive shares at one price. Multiple clearing prioritises higher bids.
If successful, allotted shares will be credited to your demat account.
Offer for sale (OFS) example
Let’s explore an OFS example to understand better how it works.
ABC Company is conducting an OFS with shares priced at ₹200 each. Two investors participate:
- Mr. V (Retail Investor):
- Bids for 5,000 shares
- Total order value: ₹10,00,000
- XYZ Capital Fund (Institutional Investor):
- Bids for 10,000 shares
- Total order value: ₹20,00,000
In this scenario, Mr. V falls under the retail category and may receive a smaller share allocation. As an institutional investor, XYZ Capital Fund is likely to have greater access to the OFS and potentially receive a larger share allocation.
What are some of the benefits of an Offer for Sale?
An Offer for Sale allows existing shareholders to sell their stakes in listed companies efficiently while providing investors opportunities to acquire shares. Let’s explore the key benefits of an OFS:
- Efficiency: The OFS process is streamlined, with bidding completed in a single day and transactions settled within two working days.
- Transparency: OFS transactions occur on stock exchange platforms, ensuring public visibility of all details.
- Cost-Effectiveness: OFS bypasses many expenses associated with traditional public offerings. Since the process doesn’t involve the company directly, it avoids costs like underwriting fees, legal fees, and registration expenses.
- Quick Execution: Unlike other offering methods, OFS doesn’t require lengthy procedures such as filing draft documents, obtaining SEBI approval, or conducting roadshows.
What are the disadvantages of an Offer for Sale?
While an OFS can provide investment opportunities, it’s important to know its potential drawbacks. Let’s explore this in detail:
- Lower Retail Allocation: While SEBI mandates a minimum 10% allocation for retail investors (up to 20% for power sector OFS), this is significantly less than the 35% typically reserved in IPOs.
- Price Volatility: OFS share prices are determined by supply and demand market forces, leading to significant price fluctuations.
- Time Constraint: OFS participation is typically limited to a single trading day. This narrow window provides less time for investors to evaluate the offer.
- Limited Information: Unlike IPOs, companies cannot provide extensive business information during an OFS.
What is the difference between an OFS and an IPO/FPO?
An OFS, Initial Public Offering (IPO), and Follow-on Public Offering (FPO) are distinct methods companies use to raise capital and manage shareholding structures. Let’s understand the key differences between them:
| Parameter | IPO/FPO | OFS |
| Definition and Purpose | The first sale of shares by a private company to the public to raise capital. | Existing shareholders, usually promoters, sell shares to the public for compliance or capital without new shares. |
| Process Differences | Includes filing a prospectus, roadshows, book building, and allotment; lengthy and complex. | It is simpler and quicker, conducted through a bidding platform with a predefined floor price, and usually takes a day or two. |
| Regulatory Differences | It is governed by strict disclosure requirements by SEBI, which requires filing a draft red herring prospectus (DRHP). | Fewer regulatory requirements; focuses on transparency and fair pricing with less extensive disclosures. |
| Investor Perspective | Seen as opportunities to invest in a company at its public market entry; higher risk due to lack of market history. | Often at a discount, typically used by institutional investors; lower risk due to existing market performance data. |
Things you need to consider before investing in an Offer for Sale
Now that you have a good grasp of what an offer for sale is let’s look at a few key things you need to consider before investing in an OFS:
- Investor Category: Determine whether you fall into the retail or institutional investor category. This classification is essential as it affects the total supply of shares available to you and your potential allocation.
- Financial Readiness: Ensure you have sufficient funds in your trading account to support your intended investment. Also, calculate the total amount needed based on the share price and the amount of shares you wish to purchase.
- Timing: Be aware of the order placement window – OFS orders can only be submitted between 9:15 am and 3:00 pm. Plan accordingly to avoid missing this crucial time frame.
- Order Type: Understand that only limited orders are accepted in an OFS. Market orders are prohibited, so you must specify your bid price when placing an order.
Conclusion
The Offer for Sale mechanism provides a streamlined, transparent, and efficient way for large shareholders to divest their holdings in listed companies. It balances the needs of sellers, institutional investors, and retail participants while ensuring market stability and regulatory compliance.
Frequently Asked Questions about Offers for Sale
Who can apply for OFS?
Retail, institutional, and non-institutional investors can apply for an Offer for Sale (OFS). However, specific eligibility factors may vary depending on the company’s guidelines and regulatory norms.
What is the allotment rule for OFS?
Allotting shares in an OFS is typically proportionate, depending on the bids received and the quantity available. Retail investors often receive priority for a certain percentage of the total shares offered.
What is the floor price of OFS?
The floor price in an OFS is the minimum price at which the shares are offered for sale. It is usually set by the seller and disclosed before the offer opens to help investors decide on their bids.
How do I check my OFS status?
Investors can check their OFS status through their brokerage accounts, which provide updates on the allotment and bid details. Additionally, the broker often communicates status updates via email or SMS.
Is it good to buy OFS shares?
Buying OFS shares can be a good opportunity if the shares are priced attractively below the market price. However, investors should thoroughly research the company’s fundamentals and market conditions before investing.
Who can buy OFS shares?
Retail investors, qualified institutional buyers (QIBs), and non-institutional investors can buy OFS shares. The offer is generally open to various investors, subject to regulatory requirements and eligibility criteria.
How does OFS affect share prices?
An OFS can affect share prices depending on the demand and supply dynamics the sale creates. If the OFS is oversubscribed, it can positively impact share prices; conversely, undersubscription may negatively impact them.
What are the rules of OFS?
The rules of OFS are governed by SEBI guidelines, which include setting a floor price, specifying the bidding period, and ensuring transparency in the allotment process. Companies must also provide adequate disclosures to inform potential investors.
What are the charges for OFS?
Charges for participating in an OFS typically include brokerage fees and applicable taxes. These charges vary among brokers and should be confirmed with the respective brokerage firm.
Why do companies go for OFS?
Companies use OFS to raise capital by selling shares to the public, often to comply with regulatory requirements or to meet funding needs. It is also a method for promoters to reduce their stake in the company.
How many days for OFS allotment?
OFS allotment typically occurs a few days after the offer closes, usually within three to five business days. The exact timeline may fluctuate based on the brokerage’s specific procedures and the company’s compliance with regulatory norms.
What is the clearing price in OFS?
The clearing price in an OFS is when the shares are allotted to the investors after all the bids are evaluated. It is determined based on the highest price at which the entire offer can be sold or the floor price if insufficient demand is above it.
