What is OFS (Offer for Sale)?
A private company launches an initial public offering (IPO) for additional funding. The company sells shares to outside investors so that it can gain access to funds for various purposes. This includes growth and expansion of the company.
However, the company’s financial problems do not end with an IPO. Sometimes, a company may need additional capital to meet its goals. That’s the time such companies can opt to go for an Offer for Sale (OFS).
What is OFS in share market?
An Offer for Sale is a mechanism where promoters in a listed company sell their shares directly to the public in a transparent manner.
This mechanism was first introduced in the market by SEBI in 2012. Through this process, promoters in public companies can sell their shares and reduce their holdings from publicly-listed companies.
This is a simpler way for public companies to sell shares and get capital compared to other options such as follow-on public offering (FPO).An FPO is a process where an already listed company issues additional shares to investors.
How OFS works?
In an OFS, promoters of a company dilute their stake by selling their shares on an exchange platform. Anyone including retail investors, companies, Foreign Institutional Investors (FIIs) and Qualified Institutional Buyers (QIBs) can bid on these shares.
List of investors who can participate in OFS
Qualified Institutional Buyers (QIBs)
Non Resident Indians (NRIs)
Foreign Portfolio Investors (FPIs)
Trusts, Hindu Undivided Families (HUFs), Body Corporates
How to bid in OFS
In an OFS, a buyer has to provide a bid in order to acquire the shares. The company sets a ‘floor price.’ Buyers cannot bid at a price below the floor price. Once the bids are placed, shares are allocated to the different buyers. There is no minimum limit to participate in an OFS. A buyer can bid for even a single share in the OFS process.
How to apply for OFS
As an individual investor, you can apply in the retail category of the OFS. In this category, your total bid value should not exceed Rs 2 lakh rupees. Otherwise, it becomes ineligible. You also require a demat account and a trading account in order to participate in an OFS. In case you are an offline investor, you can still place your bids through an assigned dealer.
Rules and regulations in an OFS
a) This facility is available only to the top 200 companies in the share market. The ranking is based on market capitalisation.
b) Non-promoter shareholders with more than 10% of share capital are also eligible to offer shares through an OFS
c) The company has to inform the stock exchanges at least two days before the OFS
d) SEBI has mandated that at least 25% of shares in an OFS must be reserved for mutual fund and insurance companies
e) In addition, a 10% reservation is made for retail buyers
Difference between OFS and FPO
OFS and follow-on public offering (FPO) are two ways a company can raise capital by selling additional shares. However, there are differences between these two methods.
An FPO is generally a lengthy process. The company is required to issue a new prospectus, which is then submitted to the Securities and Exchange Board of India (SEBI). Following that, the company has to hire managers to take care of the sale. The sale of shares can last anywhere between three and five days.
On the other hand, an OFS is much simpler. There is no requirement for the company to file any formal paperwork. In addition, the sale of shares typically takes only a single trading day.
Pros and cons of investing in OFS
Retail investors are generally offered a discount on the floor price when they buy shares through OFS. The discount is around the range of 5% in these offerings. The discounted price is one of the key benefits of investing through OFS for retail investors.
The entire process of OFS is a system based bidding platform. As a result, there is minimal paperwork required from the investor. This makes OFS a simple and less time consuming process.
When you place your bids under OFS, there are no additional charges applicable. Only the regular transaction and Securities Transaction Charges (STT) which are already levied for equity investments are applicable. This makes OFS a cost effective way of investing in equities.
Limited reservation for retail investors
As per SEBI guidelines, a minimum of 10% of the offer is supposed to be reserved for retail investors. In case of PSUs, this may go up to 20%. However, this is far lesser than the 35% reservation for retail investors in the case of IPOs.
Limited bidding window
The issue period for an OFS does not exceed more than a single trading day. In comparison, an FPO can stay open for anywhere between 3-10 days. The issuing company has to inform the stock exchanges two banking days prior to the OFS. That’s why it is important to be updated to avoid losing out on a good investment opportunity.