Last Updated on May 25, 2022 by Neera Bhardwaj

SEBI issued a regulation in 2012 that promoters of public companies cannot own more than 75% stake in the company. The promoters were forced to sell their shares, and of course, there may be a willful sale of shares too by promoters wanting to reap the benefits of the value they have created over the years. Promoters in public companies looking to sell shares and reduce their stake in the companies may resort to Offer for Sale (OFS). The shares they sell are directly offered to the public at a discount to the market price, through a bidding process on the stock exchange. In this blog, we discuss what is OFS and how it works.

Meaning of offer for sale

In an offer for sale, promoters of a company sell their stakes through an exchange platform – the NSE or the BSE. It is a very transparent process, and as per SEBI guidelines, only promoters of the top 200 companies as per market capitalization are permitted to come out with an OFS.

The concept of OFS is relatively new in the Indian market. SEBI introduced it in 2012 after it issued a guideline restricting promoters from owning more than 75% stake in listed entities. According to the rules, any promoter of the top 200 market cap companies can initiate an OFS if that promoter holds more than a 10% stake. These shares are usually offered at a discount. 

An offer for sale is nothing but a way for promoters to cash in on the value of the business they have created. OFS can also be done by a private equity firm, but it is important to note that even after an OFS, the number of outstanding shares for the company remains the same. In an offer for sale, the company sets a floor price and buyers have to bid for at least that price after which shares are allotted to shareholders. Unlike in IPOs, there is no minimum bid quantity.

Rules and regulations in an OFS

  • On the basis of market capitalization, only the top 200 companies can initiate an offer for sale.
  • Non-promoter shareholders who have more than a 10% stake can also sell their ownership in an OFS.
  • 10% reservation must be made for retail investors as per SEBI.
  • 25% reservation must be made for mutual funds, insurance companies and foreign institutional investors.

Advantages of investing in an OFS

Discounted rates: The discounted price is one of the main benefits of OFS. Usually, shares sold through OFS are sold at a discount of 5%.

Quicker and simpler: The entire process of the sale of shares is through a system-based bidding platform as a result of which there is minimal paperwork and other formalities involved.

Cost-effective: There are no additional charges applied while purchasing shares through OFS. The usual STT is levied which is the same in the case of all equity purchases.

Disadvantages of investing in an OFS

Reservation for retail Investors: In IPOs, there is a 35% reservation for retail investors as opposed to OFS where there is only a 10% reservation in most cases.

Bidding window: The issue period for an OFS is only a single day which is very less when compared with FPOs and IPOs.

How does OFS work?

An OFS is a very simple and inexpensive process. This is how an OFS works:

  • After a decision to sell a portion of the stake is made, this information needs to be communicated to SEBI at least two days prior to the OFS.
  • Unlike FPOs and IPOs, offer for sale is only open for 1 trading session. 
  • The minimum price or floor price is announced by the company and any bids below that price are not taken into consideration.
  • At the end of the day, the company allocates shares through one of the three ways: single clearing price, multiple clearing price and cut-off price. The money is then paid to promoters.

Price discovery in an offer for sale

Any retail investor can participate in an offer for sale if the investor has a dematerialisation account. Companies set a floor price and any bid below this price is rejected. OFS shares are generally distributed in three ways:

Single clearing price: When all investors are allocated shares at the same price irrespective of their bid price.
Multiple clearing price: When buyers with higher bids and quantities are given preference. In this case, different buyers get shares at varied prices.
Cut-off price option: Shares are allocated at the lowest price which is also referred to as the cut off price. There is no impact of price discovery in this case.

Is OFS a trap for investors?

Promoters are the owners of the company, can it be considered a red flag if they want to liquidate? While that can be the case, it is also important to be aware of other probable reasons promoters are downsizing their stake:

SEBI guidelines

As per SEBI guidelines, promoters of the company cannot hold more than a 75% stake in the company. In case they end up having a higher percentage of ownership they will be forced to dispose of that excess stake in some way. OFS are generally the preferred route.

Personal issues

There could be a case where an individual needs money to cater to more important issues, maybe a family emergency.

Diversification

Even promoters may want to invest in other companies while still owning a significant stake in their own companies as a diversification method for their investment portfolio.

Insider knowledge

This is a scary situation for retailers, this occurs when promoters know the company is in big trouble and they need to cash in to reduce their stake and book sufficient profits.

Difference between OFS and IPO

Number of shares: In the case of OFS, no new shares are issued whereas in the case of an IPO the company sells its shares for the first time in the primary market by either diluting promoter share or issuing fresh shares or both.

Recipient of payments: Sales proceeds are received by the promoters in an offer for sale, whereas the sale proceeds are received by the company in an IPO.

Regulations: Selling shares through OFS is much simpler, there is not much documentation and SEBI needs to be made aware a minimum of two days before the OFS. Whereas for a company to initiate an IPO, a lot of time is consumed since SEBI’s approval is mandatory.

Trading sessions: OFS is only open for a single trading session whereas IPOs are open for around 3-4 days.

Reservation: In an OFS, only 10% of the total issue is reserved for retail investors. In IPOs, 35% of the issue size is reserved for retail investors.

As mentioned above, an offer for sale is a simple and convenient way for promoters of the company to dilute their stake and sell it to the public. It is important to search about the company before investing in an OFS since there is always a possibility that the promoter knows something which the general public is unaware of. There is a chance that the major owners are using this as an escape plan. At the same time, if the company has good fundamentals and bright future prospects it is a very good opportunity to apply for shares in an OFS since most of the shares are offered at discounted prices.

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