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An Offer for Sale (OFS) is an authorised stock exchange mechanism used by promoters or major shareholders to sell a portion of their existing investment in a listed company. Introduced by SEBI in 2012, it is beneficial to reduce promoters' stakes and comply with minimum public shareholding norms. Ever since, the method of transparent divestment, OFS, has been widely adopted by the government and private entities. This article describes its meaning and its process, features, and relevance in real life.
Key Takeaways
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An Offer for Sale (OFS) enables promoters or big shareholders to sell their existing shares on the stock exchange.
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OFS is utilised to reduce promoter stakes while meeting SEBI's minimum public shareholding requirements.
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Retail investors receive at least a 10% reservation and may be eligible for a reduction on the floor price.
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Settlement occurs on a T+1 basis, with allotted shares credited to the investor's Demat accounts..
Also, learn What is Stock Exchange here.
What is an OFS?
An Offer for Sale (OFS) is a stock exchange mechanism that provides a way for promoters or major shareholders of a listed company to sell their shares directly to the public. It is primarily used to decrease promoter holdings and meet SEBI’s minimum public shareholding requirements. Through the Offer for Sale, the shares can be bought by retail investors, institutions, and other market participants in a transparent and regulated bidding system.
How Does an Offer for Sale Work?
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Major shareholders in a listed company can sell shares directly to the public through an auction on the stock exchange.
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This "Offer for Sale" (OFS) helps them reduce holdings and meet public shareholding norms.
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Investors bid for shares within a set price range, and allocations are made based on bids and available shares.
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It's a one-day event ensuring efficient price discovery and market stability.
Features of OFS
An Offer for Sale (OFS) provides a mechanism for existing shareholders, typically with a significant stake (over 10% ownership), to offload some of their holdings in a listed company. Here's a breakdown of its key features:
1. Seller Eligibility:
Only major shareholders or promoter groups can initiate an OFS. This helps companies comply with regulations mandating a minimum public shareholding.
2. Reservations for Stability:
To ensure market stability, a minimum of 25% of the offered shares are reserved for insurance companies and mutual funds.
3. Retail Investor Participation:
At least 10% of the offering is set aside for retail investors, democratising access and potentially increasing liquidity.
4. Discount Potential:
Companies may offer discounts on the floor price (minimum acceptable price) to incentivise retail investor participation.
5. Transparent Price Discovery:
The bidding process used in OFS allows for transparent price discovery, reflecting true market demand.
6. Time-Bound Process:
OFS is a one-day event, streamlining the process and minimizing market volatility.
7. Predefined Floor Price:
The selling shareholder sets a floor price, ensuring a minimum return on their investment.
8. Bidding Mechanism:
Investors can submit bids at specific prices within a designated time frame.
9. Limited Allocation
To prevent excessive concentration of shares in a single buyer (except mutual funds), a cap is placed on the amount any one bidder can acquire.
By understanding these features, both companies and investors can leverage OFS to achieve their financial goals while promoting a transparent and efficient market.
How To Apply For OFS?
If you are wondering how to apply for OFS shares, read on.
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You would need a demat and trading account to invest in an OFS.
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If you are a retail investor, you can apply for OFS if the overall bid value doesn’t cross Rs 2 lakh. If it does, it is not eligible for an OFS.
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You can bid through your trading portal if you have an online account or you go offline by placing your bids with help from your dealer.
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An investor can place orders at or above the floor price. This is the price that sellers would need to provide.
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You don’t need any documents to bid in an offer for sale. You will just be required to provide the price you are willing to pay and the quantity of shares.
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Your OFS shares will be allocated in a single clearing or multiple clearing price. In a single clearing price, each and every investor is allocated shares at a single price. In a multiple clearing price, shares are allocated by prioritising the price of the share. So, if an X company’s OFS allocation is at multiple clearing price, and the highest bid for shares at 250, followed by 220, 210 and 200, and so, then, person who has placed the bid at 250 , i.e the highest will be given priority for allotment of shares, followed by the others.
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There is also a cut-off price choice, wherein the investor can apply for shares at the cut-off price without having to worry about discovery of price during the bidding.
Example of OFS
Suppose ABC company is raising capital through OFS by selling shares at ₹100 per share.
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Now Mr X bids for 5,000 shares, thus making an order for a total of ₹5,00,000.
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At the same time, a mutual fund called DEF Capital Fund also places an order for 10,000 shares, i.e. an order of around ₹10,00,000.
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Mr X will fall under the retail category and may receive a lower share of the overall OFS.
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On the other hand, DEF Capital will be counted as an institutional investor and will have greater access to the OFS.
Rules and Regulations in an Offer for Sale
It is important to understand the rules and regulations in an OFS for the investors and promoters who want to know what is offer for sale and how it operates under the regulatory framework of SEBI. These guidelines create a process of fairness and transparency and ensure the smooth execution of the entire offer for sale process.
1. Eligibility Criteria
Only the promoters of listed companies or large shareholders who hold a minimum stake of 10% in the share capital of a company are able to initiate an OFS. In some of the cases of offer for sale, for example, government entities also use the OFS to reduce their stake in the Public sector units.
2. Notification Requirement
Promoters have to notify the stock exchange at least a day before they launch an OFS. This will ensure its transparency and provide investors with time to prepare.
3. Portion Reserved for Institutional Investors
A large portion of that offer is allotted to institutional buyers such as mutual funds and insurance companies. This provides strong demand for the offer for sale process.
4. Reservation for Retail Investors
SEBI requires a specific allocation for retail investors, typically with a discount. Many offer for sale example cases containing retail-friendly prices to encourage wider participation.
5. Price Discovery
The floor price is announced in advance of the beginning of bidding. Investors make bids, and the final allocation is done on the basis of the market price discovered.
6. Disclosure and Transparency
Promoters have to disclose important information related to the number of shares that are being offered, the purpose and ownership information. This helps to build investor confidence.
7. Regulatory Approval
OFS transactions have to abide by the guidelines of SEBI and the stock exchange. Only after being approved can the offering go live.
8. Settlement and Execution
The settlement of shares is on a T+1 basis, guaranteeing quick and efficient transfer of shares to the investors. The credit happens the next day after the trade.
9. Prohibition of Price Manipulation
SEBI periodically monitors the trading activity in order to check the artificial movement of prices before or during the OFS.
10. Compliance
Promoters must adhere to all rules established by the OFS in order to avoid penalties. Proper compliance means trust, better performance and free participation for all investors.
Things You Need to Consider Before Investing in an OFS
Before investing in OFS in the share market, the following points as listed should be considered for a smooth bidding experience:
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Investor category awareness: Know what category you fall into as a retail or institutional investor, as this influences allocation.
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Financial preparedness: Make sure you have sufficient money in your trading account to support your bid in the share market.
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Demat account requirement: A Demat account is mandatory as OFS are working in the electronic mode completely.
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Timing of Order Placement: You will be obliged to place orders only during the exchange-specified time period of bidding.
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Order type restriction: Only limit orders permitted, no market orders allowed
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Ownership limitation: No single investor (except mutual funds) can purchase more than 25% of the total OFS.
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Post-investment process: Allotted Shares will be credited in your Demat account as per the settlement cycle.
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Institutional comparison: Institutional investors may receive a greater allocation compared to retail bidders.
How to Bid and Apply for an OFS?
To apply for OFS, the process is pretty straightforward and is completely done online through your broker's trading platform. A Demat account is compulsory to be part of it.
To know how to apply for OFS, you must follow the following steps:
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Open a Demat account with a broker that is SEBI registered
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Log in to your trading account when the OFS bidding window opens and then enter the quantity and price bid at or above the floor price.
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Check your bid and be sure before you submit.
After the bidding window ends, the seller finalises the price and allocation, all according to the demand. Allotted shares are then credited to your Demat account as per the schedule of settlement.
What is the Bidding Process of OFS?
In an Offer for Sale (OFS), investors have to place bids at prices that are equal to or higher than the floor price. Bids under this are rejected. In order to apply for OFS, investors should know that allotment occurs in two ways:
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Single Clearing Price: All the successful bidders are awarded shares at a single uniform price.
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Multiple Clearing Prices: Allocation of shares is carried out starting from the highest bids.
Investors can also elect the cut-off price option in order to receive allotment at the final discovered price. Knowing how to apply for OFS helps the bidders use the right pricing strategy when bidding at the auction.
Who Can Invest in an OFS?
An OFS in the share market is available to retail as well as institutional investors.
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Retail investors refer to those whose net value at bids does not exceed ₹2 lakhs.
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Institutional investors are mutual funds, insurance companies, foreign portfolio investors, etc.
Eligibility norms and allocation percentages may vary for each OFS in the share market based on the issuer's norms and regulations laid down by the SEBI.
Also, check out Institutional Investors vs Retail Investors here.
What is the Difference Between an OFS and IPO/FPO?
Here's a breakdown of the key differences between Offer for Sale (OFS), Initial Public Offering (IPO), and Follow-on Public Offering (FPO):
1. Purpose:
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OFS: Sell existing shares by existing shareholders (promoters or large investors)
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IPO/FPO: Issue new shares by the company to raise capital
2. Impact on Company Capital:
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OFS: No change in company capital
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IPO/FPO: Increase in company capital (through issuing new shares)
3. Duration:
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OFS: Typically a one-day event
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IPO/FPO: Typically takes 3 days to complete
4. Shareholder Dilution:
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OFS: No dilution of existing shareholder ownership
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IPO/FPO: Dilution occurs as new shares are issued, decreasing existing shareholder ownership percentages
Note: An IPO can have up to 2 components, i.e. Offer for Sale or Fresh Issue. In case of a fresh issue, new shares are issued and the company capital increases. But in the case of OFS, no new shares are issued, and only existing shares are traded.
What are the Advantages of an OFS?
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Now that you know the answer to the question on how to apply for OFS shares, it is time to turn your attention to the advantages of OFS. The OFS process typically involves a discount offered on the floor price for retail investors. This discount could be in the range of 5% and is one of the main attractions for retail buyers for investing via OFS.
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Another advantage is that OFS doesn’t involve any paperwork, thereby making the whole process less time-consuming for a retail investor.
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When you ask how to apply for offer for sale, you may also wonder about any charges that are applicable for the process. The answer is that there are no extra charges, apart from the regular STT or securities transaction charges that apply for any equity investment.
What are the Disadvantages of an OFS?
While OFS is efficient, there are certain disadvantages to it:
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Limited bidding window: Investors have access to a single trading day for making orders, as a result which limits participation.
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Lower retail allocation: Retail investors get a lower allocation than institutional buyers.
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Insufficient company information: Unlike IPOs, OFS does not require detailed disclosures, so it becomes challenging to research such entities.
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Market volatility: Share prices can fluctuate significantly during an OFS because of supply and demand pressure, which puts buyers at risk.
Conclusion
An offer for sale is a hassle-free, cost-effective, and less time-consuming way for a retail investor to buy shares from a listed company. Similarly, for promoters too, it is a simple and convenient method to dilute their stakes in a listed company.