Offer for Sale (OFS): What is OFS? Know the Meaning

Offer for sale or OFS is a method wherein listed firms are allowed to sell shares via the exchange platform. The OFS method was brought in by the Securities and Exchange Board of India (SEBI) back in 2012 as a simpler one to aid promoters of listed forms to dilute their stake. Anyone can bid for these shares, be it foreign institutional investors, retail investors or companies.

Before you ask the question of how to apply for offer for sale, you should know that the OFS is available only for the leading 200 companies in the share market, based on market cap. Also, the company would need to keep the stock exchanges in the loop about the OFS at least two days in advance. Further, SEBI has it that a minimum of 25 per cent of shares in an offer for sale procedure needs to be allocated for insurance and mutual fund firms. There is also a 10 per cent reserved for retail investors/buyers.

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:

Seller Eligibility: Only major shareholders or promoter groups can initiate an OFS. This helps companies comply with regulations mandating a minimum public shareholding.
Limited Availability: OFS is restricted to the top 200 companies by market capitalisation, ensuring its use by established players.
Reservations for Stability: To ensure market stability, a minimum of 25% of the offered shares are reserved for institutional investors like insurance companies and mutual funds.
Retail Investor Participation: At least 10% of the offering is set aside for retail investors, democratising access and potentially increasing liquidity.
Discount Potential: Companies may offer discounts on the floor price (minimum acceptable price) to incentivise retail investor participation.
Transparent Price Discovery: The bidding process used in OFS allows for transparent price discovery, reflecting true market demand.
Time-Bound Process: OFS is a one-day event, streamlining the process and minimizing market volatility.
Predefined Floor Price: The selling shareholder sets a floor price, ensuring a minimum return on their investment.
Bidding Mechanism: Investors can submit bids at specific prices within a designated time frame.
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 Does OFS Work?

Major shareholders in a listed company can sell shares directly to the public through an auction on the stock exchange.
This “Offer for Sale” (OFS) helps them reduce holdings and meet public shareholding norms.
Investors bid for shares within a set price range, and allocations are made based on bids and available shares.
It’s a one-day event ensuring efficient price discovery and market stability.

How to apply for OFS?

If you are wondering how to apply for OFS shares, read on.

You would need a demat and trading account to invest in an OFS.
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.
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.
An investor can place orders at or above the floor price. This is the price that sellers would need to provide.
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.
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.
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.

- Now Mr X bids for 5,000 shares, thus making an order for a total of ₹5,00,000.
- 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.
- Mr X will fall under the retail category and may receive a lower share of the overall OFS.
- On the other hand, DEF Capital will be counted as an institutional investor and will have greater access to the OFS.

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:

OFS: Sell existing shares by existing shareholders (promoters or large investors)
IPO/FPO: Issue new shares by the company to raise capita

2. Impact on Company Capital:

OFS: No change in company capital
IPO/FPO: Increase in company capital (through issuing new shares)

3. Duration:

OFS: Typically a one-day event
IPO/FPO: Typically takes 3 days to complete

4. Shareholder Dilution:

OFS: No dilution of existing shareholder ownership
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?

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 per cent and is one of the main attractions for retail buyers for investing via OFS.
Another advantage is that OFS doesn’t involve any paperwork, thereby making the whole process less time-consuming for a retail investor.
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.

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.