Offer-for-Sale: What is it?

Offer for sale meaning: OFS stands for an offer for sale where you can sell shares through the stock exchange platform for the listed companies. Therefore, it is possible to sell a lot of a share after the IPO listing is completed.

The OFS mechanism was introduced in the Indian stock market in 2012. The purpose of ofs is to cut the promoters and comply with minimum public shareholding norms by June 2013. This method of selling shares was primarily followed by listed companies, both government-run and private, to adhere to the order set by SEBI.

You should also know about the follow-on public offering (FPO) along with what is OFS in share, in which companies raise funds by issuing new shares or the promoter sells their stakes. You can only use the existing shares. The stakeholder or promoters holding more than 10% of the share capital can come up and sell their stake.

This mechanism is available for the top 200 companies in market capitalization. In the OFS, the share allocation is reserved as 25 per cent for mutual funds and insurance. Except for these two institutions, no other single bidder is allowed to allocate more than 25 per cent of the size of the offering.

For the retail investor, 10 percent of the offered size is reserved. A seller offers the share at a bid price or final allotment price. The offer OFS window is open for a single day. It Is mandatory for the stock exchange two banking days before the OFS. 

In the OFS, the entire retail bid is supported by a 100 per cent margin in the form of cash and its equivalent. The process of ofs is quick, and the excess fund settles to the trading member on the same day or after 6 pm.

During the OFS hours, you can modify the 100 percent margin. You can modify each price except the zero percent margin; it is possible to modify upwards; you can change price and quantity. If the bid is below the floor price, then it is rejected. The lot allocation will be subject to the final discovery. An FPO defines a price band within which bids are placed.

The floor price is a predetermined price set at a discount price of a share. You can consider the example of MMTC in June 2013, where the ofs was offered at a steep discount of seventy-two per cent, and premium valuation lacked efficient price discovery. It resulted in the stock crash and is now traded below the pre-ofs price. You must have understood what is OFS in share market, now let’s discuss who can participate in ofs. 

Who Can Invest in OFS?

If you are a retail investor, you can apply for the retail category of the OFS. In this category, the total bid value should not be more than two lakh rupees, or else it will be rejected from the bid. For taking part in these trades, you need to have a Demat and trading account. In the case of the offline method, you can place your bids through a licensed dealer. There are other participants in offer bids for sale banks and financial firms.

Rules and Regulations for Investing in OFS

Now we need to understand the rules and regulations of OFS investment. Here are some rules.

• The first rule is that this method is available for the top 200 companies on the stock market. Next, the ranking is listed with the market capitalization of each company.
• The company that offers for sale needs to inform the stock exchanges two days before the OFS.
• A 10% share for the retail investor and at least 25% of shares must be reserved for mutual funds and insurance companies.
• A non-promoters with a 10 per cent share capital than that promoter is eligible to offer a share through an OFS.

Reason For an OFS

You know that the promoters are the owners of the company. So why do they want to sell their ownership? The answer can be multiple reasons. But it doesn’t always mean that a promoter no longer owns a part of the company. Some of the reason for offering for sale is:

• As per SEBI guidelines, a promoter cannot hold more than 75% of a stake in a listed company.
• A promoter needs funds for their reason, as equity is an asset for a promoter that they can sell to gain funds.
• To diversify their portfolio, an investor may sell its stake in the company and invest in some other financial assets.
• The last reason is the company’s collapse or any significant future loss etc.

Pros and Cons of Investing in OFS

Here are the following pros of OFS investing. 

1. A retail investor generally offers a discount on the floor price when buying the shares. The discount price of a share is around 5% in the offer for sale, and it’s one of the best benefits for any retail investor.
2. The entire procedure for buying and selling is paperless through a bidding platform. Therefore, the process of OFS is easy and time friendly for consumers.
3. When you order for OFS, there are no additional charges. You need to pay only the regular and security transaction charges applicable to equity trading.

Here are the following cons of OFS investing. 

1. In the case of PSUs, this reserved number goes up to 20%, and in the IPO, it is reserved till 20%. 
2. It is impossible to exceed the issue period of OFS for just a single day.
3. Unlike an FPO which is open for 3-10 days. The issuing company needs to inform the stock exchange about the OFS within two days. It’s better to be updated and avoid losing a good investment opportunity.

How to Bid in an OFS?

You need to bid higher than the floor price to buy the allocated offer for sale. A floor price is a minimum price set. So, it is impossible to accept any bid lower than the floor price for the OFS. So there are two general ways to allocate the OFS.

Single Clearing Price

All the investor gets the allocated share at the same or constant price at a single clearing price.

Multiple Clearing Prices

The share issued to investors is based on the price priority in multiple clearing prices.  To understand this concept further, we can take examples such as: 

Suppose there are two investors named Ram and Gopal who had applied for an offer for sale. As the offer for sale meaning the price bid of ofs from Ram is Rs.30/- per share, and for Gopal, it is Rs.50/- per share. But as the share price is higher, Gopal will get more benefits and be allocated the shares. 

There is also one more option of cut-off price option. In cut-off price, one can set the lowest price when an investor is allocated shares during an offer for sale. For a risk-averse investment, investors can place a cut-off price without stressing price discovery at the moment of ofs bidding.

Conclusion

So now you know what is OFS in stock market along with the difference between the IPO and OFS. The OFS does not result in the fresh raising of funds. In OFS, an existing shareholder dilutes their share through the primary market, and in return, the shareholder transfers the ownership to another shareholder. So it does not mean an increase in growth in a company’s capital. 

Some companies give options to private equity as a combined IPO and OFS for the exit of promoters and investors. One of the examples of an IPO and OFS combined launch is Narayan Hrudayalaya.