Investing in the stock market can be challenging, especially when a new investor comes across unfamiliar terms. One such concept is offer for sale (OFS). In this article, we will discuss OFS, its workings, benefits, and look at a case study. Lastly, we will examine how mutual fund investors can take advantage of OFS to develop their own investment strategies.
What is offer for sale (OFS)?
Offer for sale (OFS) is a procedure in the Indian stock market under which shareholders of listed companies, including promoters and large institutional investors, offer their existing shares to investors on the stock exchange. This is typically done to comply with regulatory guidelines on ownership limits or for liquidity. OFS bids happen in the secondary market as it does not include any fresh shares.
How does an offer for sale work?
When the promoters of a company decide to divest their holdings, they might opt for an OFS. One common reason is to meet regulatory guidelines – according to SEBI rules, all listed companies need to maintain a minimum public shareholding of 25%. So, if promoter or shareholder stake exceeds 75%, they can offload some shares through an OFS.
The sale is conducted on a recognised stock exchange, where buyers can place bids for the shares being offered. The OFS can be conducted using a floor price with price discovery or via a fixed price route (less common), depending on the structure chosen by the seller.
OFS may be used for various reasons, including (but not limited to) complying with SEBI requirements, facilitating disinvestment, or monetising promoter holdings.
Key features of an offer for sale
Here are some of the key features of an OFS:
- No fresh shares issued: Unlike an IPO, an OFS does not result in the issuance of new shares.
- Auction mechanism: OFS typically uses an auction mechanism where institutional and retail investors can bid for shares either at or above the floor price or within the price band.
- Promoter-led: The primary sellers in an OFS are usually promoters or large institutional investors.
- Transparent price discovery: OFS provides a transparent, exchange-based mechanism for purchasing shares from major shareholders, often with a pre-announced floor price.
Read Also: What is the Process of Selling IPO Shares
How to participate in an offer for sale?
Participating in an offer for sale (OFS) is relatively straightforward, but it's important to follow the right steps:
- Demat account: Like any other stock market investment, you will need a demat account to participate in an OFS.
- Bidding process: Once the OFS is announced, you will need to place bids within the specified time frame. Retail investors may opt for the cut-off price, if offered, instead of specifying a bid price.
- Wait for allotment: Once the bidding closes, the allotment is made based on the bids received. Retail allotment is made on a proportionate basis in case of oversubscription, and full allotment is not guaranteed.
- Settlement: The shares will get credited to the bidders’ demat accounts and the amount for the same will be deducted from their bank accounts to complete the transaction.
Read Also: Cut-Off Price in IPO: Meaning, Role & How It Works
Bidding process in OFS
The bidding process in an offer for sale involves the participation of both institutional and retail investors. The process generally works as follows:
- Retail investors: May place bids at the floor price or select the cut-off price (if permitted). A minimum of 10% of the total offer is reserved for retail investors.
- Institutional investors: Can bid in larger quantities, and allocation is made based on price priority—those bidding higher may get preference.
- Bid allocation: In case of oversubscription, retail allotment is proportionate, and not all bids are guaranteed allotment, even if placed at the cut-off price.
In terms of short selling, the bidding process in an OFS differs since the sale involves actual shares being transferred rather than borrowing shares to sell short.
Offer for sale example
In order to understand what is offer for sale, let’s take an example:
Assume there is a big company in India, ABC Ltd., which is already listed on the stock exchange. The promoters of the company want to reduce their holding from 70% to 50% and in order to comply with SEBI's public float requirement, they go down the OFS route.
The company announces an OFS where 20% of the total shares are being sold. Retail investors and institutional investors are all allowed to bid. Once the auction is complete, the price is determined by the auction in which the shares are allocated.
Read Also: How to Invest in an IPO: Step-by-Step Guide
Benefits of offer for sale
There are several benefits of offer for sale (OFS) for both companies and investors. These benefits include:
- Liquidity for sellers: For promoters or large investors, an OFS provides an effective way to liquidate their holdings without having to sell their shares on the open market.
- Meets regulatory requirements: OFS helps meet the minimum public float requirements set by SEBI, enabling companies to stay compliant with listing rules.
- Opportunity for retail investors: Retail investors often get access to large-scale institutional offerings, which at times, might not be available in regular trading.
- Pricing transparency: The auction-based system or fixed price method ensures that the price of shares is transparent and fair.
Things you need to consider before investing in OFS
- Market conditions: Ensure that the market conditions are favourable and that you understand the volatility involved.
- Company fundamentals: Just like any investment, it's important to evaluate the company's financial health and business model before participating.
- Regulatory oversight: Ensure that the OFS adheres to SEBI's guidelines to protect your interests as an investor.
- Investment horizon: Since OFS shares are typically available for short-term investment, assess whether it aligns with your long-term financial goals.
Conclusion
An offer for sale (OFS) is a financial mechanism that allows promoters or large shareholders to sell their shares in the market. By understanding what is offer for sale, its features, and how it works, Indian investors can better navigate the complexities of the stock market and leverage opportunities for better investment returns. Whether you're actively involved in mutual funds or directly investing in stocks, the OFS model is a crucial piece of the puzzle that investors should familiarise themselves with to make well-informed decisions.
FAQs:
What is OFS?
An offer for sale (OFS) is a process in which existing shareholders offer their shares to the public through a stock exchange, usually to meet regulatory requirements or to raise liquidity.
Who can invest in OFS?
Any institutional or retail investor can invest in an OFS with some restrictions like share caps for retail investors.
What are the disadvantages of OFS?
In an OFS, only 10% of the shares are reserved for retail investors. So, a higher demand or a lower number of shares can reduce chances of allotment.
How are OFS allocations made?
OFS allocations depend on investor category and bid price. Non-retail investors are allotted shares based on price priority. Retail investors who bid at or above the cut-off price are eligible for allotment, but in case of oversubscription, shares are allotted on a proportionate basis—however, allotment is not guaranteed even if the bid is above cut-off price.
Who may not take part in an OFS bid?
Promoters cannot participate in their own OFS. Other related parties may be restricted based on insider trading regulations and company compliance policies.
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