We are familiar with the term IPO (Initial Public Offerings). IPO was introduced a long time back in the Indian stock market. OFS or Offer for Sale is quite a new concept, launched in the market by SEBI in 2012. Many of us have confusion regarding the two but these are entirely separate concepts. IPO (Initial Public Offering) is the first sale of a company’s common shares to public investors at large while OFS (Offer for Sale) is a way by which promoters of a listed company offers to sell their shares publicly.
What is Offer for Sale (OFS)?
OFS is such a mechanism through which promoters (of listed companies) dilute stake by an exchanged platform. Here, the promoters perform the role of sellers and bidders include market participants individual (retail), companies, QIB (qualified institutional buyers), FII (Foreign institutional buyer). Now, the question is what is the promoters’ requirement of selling shares. The answer is given below:
What is the Requirement of OFS?
The reasons for OFS may be many. If promoters have the requirement of instant cash, they can offer shares. Besides this, as per the SEBI rules, a listed company’s promoters holdings should not be more than 75%, for bank 25%. So, in that case, if promoters’ hold more stake than that, they sell their shares through the mechanism. Besides this, the Government can sell its stakes in a less complex way by using the specific process.
Offerings for Market Participant
As I’ve mentioned earlier this content that there are multiple market participants in this Offer for Sale. The investors can be retail insurance, mutual funds, qualified institutional buyers, non-resident Indians, foreign portfolio investors, trusts, Hindu undivided families (HUF), body corporates. To make the point more clear, a list of participants is given below:
The particular mechanism is allowed for the top 200 companies (in terms of market cap). In the offer for sale, 25% of shares are reserved for mutual funds (MFs) and insurance companies. Hence, no other bidder, other than these two institutional categories is allocated more than 25% of the size of the offering.
For retail investors, a minimum of 10% of the offer size is reserved. DISCOUNT (if promoters offer) is only applicable for retail investors either on the bid price or on the final allotment price.
How to Apply for OFS?
Now, come to one of the most important points of the content, how to apply for it. The points are stated below:
- To participate in the mechanism, one has to have a registered DEMAT and Trading account. Offline investors can apply for it through an assigned dealer.
- Investors have to place bids through their brokers on the trading platform. Brokers can also bid directly on behalf of their clients (investors).
- The modification process can be done until the last 60 minutes of trading.
- Promoters fix a minimum price for shares, known as the floor price. Bids below the floor price are not accepted.
- Once the bidding is over, successful bidders are allotted shares in their DEMAT account on the very next day.
Rules and Regulations of OFS
As per the SEBI, there are some rules and regulation on the mechanism. Some of the rules are given below:
- The offer is available only for the top 200 companies (based on the market cap)
- Non-promoter shareholders who have more than 10% os share capital are also eligible for the OFS.
- At least two days before the offer for sale, the company has to inform the stock exchange.
- As per the SEBI guideline, at least 25% of shares in OFS must be reserved for mutual fund and insurance companies.
- Only 10% reservation is made for retail or individual buyers.
Advantage and Limitation of Offer for Sale
Here, under the section, we are going to demonstrate the advantage and limitation of the method.
- Generally, Retail investors are offered a discount from promoters on the floor price in OFS.
- Those whose orders are not completed will get a refund on the very next day.
- The entire process is based on bidding. Hence, the process is quite simple and required minimal paperwork.
- There are no additional charges applied for the bids. The transaction and securities transaction charges are regular in this process. It makes cost-effective for the investors.
- The discount percentage is limited and not mandatory.
- Limited reservation for retail investors.
- The competition on the bid is quite high.
Conclusion (Sum up)
One of the main reasons behind the process is it is a less complex way to sell stakes. By using the rule, the Government will take to sell its share in some of the biggest companies it owns. Many of us also get confused between OFS and FPO (follow on public offerings). Though these two are the ways by which a company can raise capital by selling additional shares, there are significant differences between the two.
FPO is a long or lengthy process. Here, the company needs to issue a new prospectus which is submitted to the SEBI (Securities and Exchange Board of India). After that, the company has to hire a manager to take care of the sale. The procedure of sale of shares can last anywhere between three and five days.
On the other side, Offer for sale is much simpler. There is no need for the company to file any formal paperwork. It takes only one single trading day.
So, these are some of the basic concepts which can provide guidance to the investors.