What is Offer for Sale (OFS)

Offer for Sale means promoters sell shares to raise funds for growth & expansion, gaining access to capital through sale to outside investors.
What is Offer for Sale (OFS)
3 mins
29 June 2024

Offer for Sale (OFS) is a simpler method used by promoters of public companies, especially in India, to sell their shares through a bidding platform on the stock exchange, reducing their holdings in a straightforward auction process.

In an OFS, the selling shareholder sets a floor price, which is the minimum price at which shares can be offered. The demand may come from existing shareholders, retail investors, and institutional investors, who bid for shares. The auction typically lasts for a few hours, and the seller can accept bids from investors during this period.

OFS provides a way for stakeholders to liquidate some of their holdings in a listed company and raise funds. It provides a simple and efficient way for companies to comply with the minimum public shareholding requirement of the SEBI regulations.

Features of offer for sale (OFS)

The following features collectively make OFS a flexible and efficient mechanism for shareholders to monetise their investments while ensuring fair market participation and regulatory compliance.

1. Ownership requirement

Only shareholders with over 10% of a company's share capital can propose an OFS. It's used when existing shares are added to the market.

2. Accessible to leading companies

OFS is available to the top 200 companies by market capitalisation.

3. Reserved shares

25% of shares are reserved for Insurance Corporations and Mutual Funds. No single bidder, other than these, can be awarded more than 25% of the bid amount.

4. Retail investor participation

At least 10% of the offering size is reserved for retail investors, who may receive a discount on the offer price.

5. Duration and notification

The OFS counter is open for one day. The company must notify stock exchanges at least two days before the OFS.

6. Comparison with FPO

Compared to Follow-On Public Offering (FPO), OFS is faster and more efficient. FPOs are open for 3 to 10 days and involve a longer process.

7. Hedged retail offers

All retail offer amounts in OFS are 100% hedged by cash and cash equivalent margins, ensuring a secure process.

8. Speedy process

Excess funds are returned the same day after 6:00 p.m. if there is non-allotment or partial allocation.

9. Margin offers

100% margin offers can change during OFS business hours. Zero percent margin offers can only be changed upwards.

10. Cancellation and rejection

Offers below the minimum price are rejected. The final assignment is subject to price discovery. In contrast, an FPO involves setting a price range, and bids are placed within that range.

Rules and regulations in an offer for sale

The rules and regulations governing an Offer for Sale (OFS) of shares ensure orderly conduct and fair participation in the market. Here are the key regulations based on the provided reference and SEBI guidelines:

1. Eligibility criteria

OFS is available only to companies ranked among the Top 200 by market capitalisation in the equity market.

2. Notification requirement

The company must inform the stock exchanges at least two trading days prior to the date of the OFS.

3. Reserved portion for institutional investors

At least 25% of the shares offered through OFS must be reserved for Mutual Funds and Insurance Companies. No single bidder other than these entities can be allocated more than 25% of the shares offered.

4. Reservation for retail investors

A minimum reservation of 10% of the shares is made for retail investors, ensuring their participation in the offering.

5. Price discovery

The price of shares offered in an OFS is determined through a transparent bidding process on the stock exchange platform. Bidders specify the quantity and price at which they are willing to bid.

6. Disclosure and transparency

Promoters and companies must disclose all material information regarding the OFS, including the total number of shares offered, the floor price, and other relevant details, ensuring transparency for investors.

7. Regulatory approval

Prior approval from SEBI and compliance with stock exchange regulations are mandatory before conducting an OFS. The offer document must be filed with the exchanges for their approval.

8. Settlement and execution

The OFS is executed through the stock exchange mechanism, and settlement occurs as per the exchange's settlement cycle. All transactions must comply with SEBI regulations and guidelines.

9. Prohibition on price manipulation

Any attempt to manipulate the price of shares during the bidding process or post-OFS is strictly prohibited, ensuring market integrity.

10. Compliance

Promoters, companies, and intermediaries involved in the OFS must adhere to all applicable laws, regulations, and guidelines issued by SEBI and other regulatory authorities to protect the interests of investors and maintain market credibility.

These rules and regulations collectively aim to promote fair market practices, protect investor interests, and maintain market integrity during an Offer for Sale of shares.

How OFS works

  1. Announcement of the OFS: The seller announces the OFS and the floor price to the stock exchange.
  2. Order submission: Investors can place their bids for the shares at or above the floor price during the bidding period.
  3. Allocation of shares: The seller evaluates the bids and decides on the allocation of shares based on the price and the number of bids received. The shares are allocated to successful bidders.
  4. Settlement: The shares are credited to the Demat accounts of the successful bidders, and the payment is debited from their bank accounts.

The seller can decide to accept the bids at or above the floor price. If the bids are lower than the floor price, the OFS is considered unsuccessful, and the shares remain with the seller.

OFS is a cost-effective and efficient way for listed companies to raise money in compliance with the SEBI regulations requiring a minimum public shareholding of 10%. It is a transparent process that provides an opportunity for investors to buy shares directly from the seller at a predetermined price.

How to bid and apply for an OFS?

To participate in an OFS, investors need to have a Demat account. The bidding process can be done through the stockbroker's trading platform or by using other designated channels as specified by the stock exchange.

To invest in an OFS (Offer for Sale), follow these steps:

  1. Open a Demat account with a registered broking firm.
  2. Once the bidding window opens, log in to your trading account and place your bids, specifying the quantity and price at or above the floor price.
  3. Review and confirm your bid.

Monitor the bidding window for any updates or changes. After the bidding window closes, the seller determines the final price and allocation of shares. Allotted shares will be credited to your Demat account, such as the one with BFSL.

Offer for sale (OFS) example:

ABC company decides to conduct an OFS with a minimum share price of Rs. 150.

Investors:

  • Ms. Patel: A retail investor eligible for 1500 shares.
  • Infinite capital fund: An institutional investor entitled to 2000 shares.

Total supply calculation:

1. Ms. Patel's offer:

  • Total supply = Limit price * Number of shares = Rs. 150 * 1500 = Rs. 225,000.

2. Infinite capital fund's offer:

  • Total supply = Limit price * Number of shares = Rs. 150 * 2000 = Rs. 300,000.

Retail and institutional categories:

  • Ms. Patel: Her offer falls within the retail category.
  • Infinite capital fund: As an institutional investor, they are eligible for the institutional category, securing a larger share with a higher total supply.

This example illustrates the differential treatment based on investor types in an OFS, with institutional investors having the potential for a higher total supply compared to retail investors.

What is the difference between an OFS and IPO/ FPO?

While OFS, IPO (Initial Public Offering), and FPO (Follow-on Public Offering) are methods used by companies to sell shares, there are distinct differences between them.

  • Nature of Shares: In an OFS, existing shareholders sell their shares to the public, whereas in an IPO or FPO, the company issues new shares to raise capital.
  • Purpose: An OFS allows existing shareholders to divest their holdings, provide an exit route, or meet regulatory requirements. On the other hand, IPOs (Initial Public Offering) and FPOs are primarily aimed at raising capital for the company's expansion or other financial needs.
  • Underwriting: IPOs and FPOs often involve underwriters like investment banks are involved, who guarantee the subscription of shares, ensuring that the company raises the desired capital. In an OFS, usually there is no underwriting involved causing the selling shareholders to take some risk, but some sellers may opt for underwriting to ensure a successful sale of shares.

What are the advantages of an OFS?

  • Cost-effective: OFS is a cost-effective way for promoters or existing shareholders to sell their shares in a listed company since the process does not involve the company itself. This bypasses the expenses associated with an IPO or FPO, such as underwriting fees, legal fees, and registration expenses.
  • Efficient: OFS is an efficient way for stakeholders to liquidate their holdings in a listed company and raise funds as the bidding process is carried out in a single day, and the transaction is settled within two working days.
  • Quick Execution: OFS does not require a lengthy process of filing a draft offer document, getting the document approved by SEBI, and undertaking roadshows to invite bids; hence, it helps in quick execution of the transaction.
  • Transparency: OFS is a transparent process because the bidding happens on a stock exchange platform, where all the details are visible to the public. The seller sets a floor price, which is the minimum price at which the shares can be bid for, and the bid data is available in real-time.
  • Flexible: OFS provides sellers with the flexibility to choose the number of shares they want to sell and at what price. The seller can also decide not to sell shares if the bids do not meet their expectations.

What are the disadvantages of an OFS?

  1. Limited window to participate: The window to participate in the OFS is usually limited to one trading day, unlike in Follow-on Public Offerings (FPOs) where investors get at least three days to place their bids. This provides limited opportunity for the investors to participate in the OFS and gain an advantage of the same.
  2. Retail investors receive a lower allocation: According to SEBI norms, retail investors must receive at least 10% of the offer, which could be as high as 20% in the case of power supplies. However, this is significantly lower than the 35% reserved for individual investors in case of initial public offerings (IPOs).
  3. Limited information: Unlike IPOs, where companies are required to provide detailed information about their business, OFS does not require companies to provide any such information. This can make it difficult for investors to make informed decisions.
  4. Market volatility: The price of shares in an OFS is determined by market demand and supply. This can lead to high volatility in the share price, which can be risky for investors.

Things you need to consider before investing in an OFS

  1. Investor category awareness:Investors should identify whether they fall into the retail or institutional category. This distinction determines the total supply and potential share allocation.
  2. Financial preparedness:Assess whether you have the required funds in your trading account. For instance, Ms. Patel should ensure she has Rs. 225,000 to support her offer.
  3. Demat account necessity:Verify that you have a Demat account as OFS transactions can only be conducted through this electronic format.
  4. Order placement timing:Orders for OFS can only be placed between 9:15 am and 3:00 pm. Investors need to submit their orders within this timeframe.
  5. Order type consideration:Understand the order type limitations. Only limited orders can be placed; market orders are not allowed.
  6. Ownership limitation recognition:Acknowledge that companies are restricted from selling more than 25% of the OFS to a single offeror, excluding mutual funds.
  7. Post-investment process awareness:Recognise that successful bidders can expect shares to be credited to their Demat accounts as per the trade settlement cycle.
  8. Comparison with Institutional Investors:Be aware of the potential for institutional investors to secure a higher total supply compared to retail investors.

Conclusion

Overall, OFS provides a cost-effective, efficient, and transparent way for promoters and existing shareholders to sell a part of their shareholding in a listed company and raise funds.

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Frequently asked questions

What is OFS?

Offer for Sale (OFS) is a simple way for current shareholders, often company promoters, to sell or decrease their ownership in a listed company using a bidding system on the exchange.

Who can invest in OFS?

All market participants, including individuals, mutual funds, foreign portfolio investors (FPIs/FIIs), insurance companies, corporates, other qualified institutional bidders (QIBs), HUFs, NRIs, etc., are eligible to bid/participate in the OFS process to acquire shares.

What is a significant drawback of OFS?

A major drawback of OFS is the lack of control the seller has over the share price. The price is determined by market forces of demand and supply, potentially resulting in a lower-than-expected selling price.

How is OFS allocation determined?

Investors can participate in OFS by submitting bids through existing Trading Members of NSE. They must provide bids specifying the quantity and price at which they wish to bid. Retail investors may also have the option to bid at the "cut-off," with the allocation being based on the cut-off price determined in the non-retail category.

Who is restricted from participating in the OFS bid?

The promoter of the company and its affiliated entities are the only entities prohibited from participating in the OFS bid.

What is the difference between IPO and offer for sale?

An Initial Public Offering (IPO) involves a company issuing new shares to the public for the first time, raising capital for growth. In contrast, an Offer for Sale (OFS) allows existing shareholders, like promoters or large investors, to sell their shares to the public. IPOs create new capital for the company, while OFS provides liquidity to existing shareholders without generating new funds for the company.

What are the benefits of OFS?

Offer for Sale (OFS) provides liquidity to existing shareholders by allowing them to sell their shares directly to the public. It helps promoters or large investors diversify their holdings, comply with regulatory requirements on minimum public shareholding, and realise their investments efficiently through transparent market mechanisms.

Is OFS good or bad?

OFS can be beneficial as it provides liquidity and price discovery for existing shareholders, fostering market participation. However, it depends on the context and objectives of shareholders and the company. It's essential to consider factors like market conditions, regulatory compliance, and shareholder interests when evaluating whether OFS is favourable.

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