IPO and OFS are closely related, and both serve the same purpose of raising capital from the general public. However, they have a distinct working mechanism. An Initial Public Offering (IPO), as the name suggests, is when a private company puts up its share to the public for the first time.
But even post an IPO, either there may not have been enough funds raised or there may soon be a need for further funds for running the company at a future point in time. That’s when an Offer for Sale (OFS) is an available mechanism to promoters to raise additional capital. The sections below will discuss OFS in detail and how it works.
What Is an Offer for Sale?
The Securities and Exchange Board of India (SEBI) introduced OFS to make it easy for promoters of publicly-owned companies to reduce their shareholdings. However, not all companies are allowed to participate in OFS. As per SEBI guidelines, any company having a market capitalisation of 1000 crore or above can participate in OFS.
Recently, SEBI has extended the guidelines, which allowed any non-promoter holding more than 10% of a company’s shares to participate in an Offer for Sale.
Who Can Purchase Shares from an OFS?
The following entities are allowed to invest in shares offered via an OFS:
- Retail investors
- Insurance companies
- Foreign Portfolio Investors (FPIs)
- Qualified Institutional Buyers (QIBs)
- Non-Residential Indians (NRIs)
- HUFs (Hindu Undivided Families), trusts and corporations
How to Apply for an OFS?
For sellers, they will have to inform the stock exchange T+2 days (T being the OFS issue day) before the OFS opening day. Furthermore, they will be required to submit the intent behind the OFS issue via an OFS announcement notice, which will subsequently be updated on the exchange board’s website to inform potential investors.
OFS announcement notice contains the following information
- Name of the company
- Name of the promoter and shareholders
- Shares offered
- Floor price
- Discounts or reservations for retail investors, if any
As a retail investor, you will require a Demat account, a trading account and a primary bank account to subscribe to an OFS.
Retail investors can place multiple bids from the same account. However, retail investors can only cumulatively bid up to ₹2 lakh, beyond which the bids are ineligible. Furthermore, companies establish a floor or minimum price below which bids are not accepted. Therefore, make sure to place bids accordingly to receive OFS shares.
OFS Bidding Processes
To subscribe to shares of an OFS, you need to bid for a price higher than the announced floor price. If your bid is eligible, the classification of shares is in the following ways:
At a Single Clearance Price
In this process, the clearance price is fixed. Therefore, all investors are allotted shares at the same price.
At Multiple Clearance Prices
In this case, companies prioritise higher bids while allocating shares.
At the Cut-off Price
The allocation of shares on a cut-off price is the lowest price to investors through an OFS. Therefore, investors can apply for shares at cut-off prices without worrying about price movements.
Conditions That Apply on an Offer For Sale
The pointers below compile some of the main conditions for applying for an OFS.
- They reserve at least 10% of the shares on sale for retail investors.
- The offer size of the OFS shall be a minimum of ₹25 crore. It can be less only when the issuing company wants to meet its minimum public shareholding percentage of 25%.
- Only shareholders having more than 10% of a corporation’s ownership can sell their stakes to the public via an OFS.
- You can place a bid for shares of an OFS any time from 9:15 AM to 3 PM within the offer period.
- An OFS can be completed within one trading day, unlike an IPO, which remains open for 3 days.
- A minimum of 25% of the offered share should be reserved for mutual funds and insurance companies.
What Are the Pros and Cons of an OFS?
Now that you are aware of OFS and its application procedures, let’s learn some of its advantages and disadvantages for both issuers and investors:
- Discounted Price
Retail investors often avail discounts on the cutoff price. These discounts revolve around a 5% ballpark. Therefore, this is one of the key benefits of investing in OFS shares.
- Minimal Paperwork
Unlike IPO, OFS does not require a corporation to submit a Draft Red Herring Prospectus (DRHP) to SEBI for approval.
- Cost Effective
OFS involves no additional charges except the regular transactional charges and Securities Transaction Tax (STT).
- Lower Reservation for Retail Investors
In OFS, compared to an IPO, a lower share percentage is set aside for ordinary investors, offering a minimum 10% reservation for retail investors. However, in the case of PSUs, the reservation may go up to 20% for an OFS.
- Limited Trading Hours
After the issue of OFS during a trading session, investors may lose a lucrative opportunity to invest in high-prospect shares. In comparison, Follow-on Public Offerings (FPOs) and IPOs remain open for anywhere between 3 to 10 days. Therefore, investors must go through the hassle to stay updated on every market movement.
OFS can be a profitable means for both buyers and sellers. Promoters get to diversify their shareholdings, whereas the investors enjoy lucrative investment opportunities to earn high returns potentially.
However, you must know the intent behind issuing shares through OFS. For example, company shareholders and promoters may have access to insider information and may be planning to exit their investments to safeguard their interests. That is why sufficient research is a must before subscribing to an OFS.
Frequently Asked Question (FAQs)
What is a clearance or cut off price in OFS?
A cutoff price is the lowest price at which an OFS offers a subscription to its investors. Cutoff prices are separate for retail and non-retail categories of investors.
What charges are levied on OFS trading?
Regular transactional and Securities Transaction Charges (STT) are applicable on issuing shares via an OFS.
Can I modify or cancel my bids?
Yes, you can modify or cancel your bids within the OFS trading session, depending on the margin type selected.
Nishant is a qualified lawyer from NALSAR University of Law, Hyderabad having 7+ years of experience and is the Chief Compliance and Legal Officer at Wint Wealth. He has been working in the finance and wealth management space for the past 5+ years and is an NISM certified mutual fund expert.
He has previously worked for Khaitan & Co and Scripbox.