An Offer for Sale (OFS) is a streamlined mechanism through which a company or its major shareholders sell their shares to the public. Below is a step-by-step explanation of how the OFS process works:
- Announcement: The seller publicly announces the OFS and specifies a minimum price, known as the floor price, for the shares being sold. This information is disclosed on the stock exchange platform.
- Bidding: During the bidding period, investors place bids for the shares. These bids must meet or exceed the declared floor price to be considered valid.
- Allocation: After the bidding period closes, the seller evaluates all bids and decides how many shares will be allocated to each bidder based on their offers.
- Settlement: Shares are credited to the successful bidders’ demat accounts, and the corresponding payment is deducted from their bank accounts to complete the transaction.
If the bids fail to meet the floor price, the OFS is deemed unsuccessful, and the shares remain with the seller.
The OFS mechanism enables companies to raise funds efficiently and helps them meet regulatory requirements, such as ensuring compliance with minimum public shareholding norms.
Features of offer for sale (OFS)
The following features collectively make OFS a flexible and efficient mechanism for shareholders to monetise their investments while ensuring fair market participation and regulatory compliance.
1. Ownership requirement
Only shareholders with over 10% of a company's share capital can propose an OFS. It's used when existing shares are added to the market.
2. Accessible to leading companies
OFS is available to the top 200 companies by market capitalisation.
3. Reserved shares
25% of shares are reserved for Insurance Corporations and Mutual Funds. No single bidder, other than these, can be awarded more than 25% of the bid amount.
4. Retail investor participation
At least 10% of the offering size is reserved for retail investors, who may receive a discount on the offer price.
5. Duration and notification
The OFS counter is open for one day. The company must notify stock exchanges at least two days before the OFS.
6. Comparison with FPO
Compared to Follow-On Public Offering (FPO), OFS is faster and more efficient. FPOs are open for 3 to 10 days and involve a longer process.
7. Hedged retail offers
All retail offer amounts in OFS are 100% hedged by cash and cash equivalent margins, ensuring a secure process.
8. Speedy process
Excess funds are returned the same day after 6:00 p.m. if there is non-allotment or partial allocation.
9. Margin offers
100% margin offers can change during OFS business hours. Zero percent margin offers can only be changed upwards.
10. Cancellation and rejection
Offers below the minimum price are rejected. The final assignment is subject to price discovery. In contrast, an FPO involves setting a price range, and bids are placed within that range.
How to apply for OFS?
Applying for an Offer for Sale (OFS) is a straightforward process that requires a demat and trading account. Here’s a step-by-step guide:
- Eligibility for retail investors:
Retail investors can participate in an OFS provided the total bid value does not exceed Rs. 2 lakh. If the bid value surpasses this limit, the application will not qualify under the retail investor category.
- Bidding process:
- Online: Log in to your trading account and place your bid through the OFS section on the portal.
- Offline: Contact your broker or dealer to place bids on your behalf.
- Bid price and quantity:
Investors must specify the price they are willing to pay and the number of shares they want to buy. The bid price must meet or exceed the floor price set by the seller.
- Allocation process:
Shares in an OFS are allocated either at a single clearing price or a multiple clearing price:
- Single clearing price: All investors are allotted shares at a uniform price.
- Multiple clearing price: Shares are prioritised based on bid prices. For example, if Company Y has a floor price of Rs. 180 and receives bids at Rs. 250, Rs. 220, Rs. 200, and Rs. 180, investors bidding Rs. 250 will receive allocation first, followed by those at lower prices.
- Cut-off price option:
Investors who prefer not to specify a bid price can opt for the cut-off price. This allows participation without worrying about price discovery during the bidding process.
By following these steps, you can seamlessly apply for shares in an OFS and take advantage of this investment opportunity.
Rules and regulations in an offer for sale
The rules and regulations governing an Offer for Sale (OFS) of shares ensure orderly conduct and fair participation in the market. Here are the key regulations based on the provided reference and SEBI guidelines:
1. Eligibility criteria
OFS is available only to companies ranked among the Top 200 by market capitalisation in the equity market.
2. Notification requirement
The company must inform the stock exchanges at least two trading days prior to the date of the OFS.
3. Reserved portion for institutional investors
At least 25% of the shares offered through OFS must be reserved for Mutual Funds and Insurance Companies. No single bidder other than these entities can be allocated more than 25% of the shares offered.
4. Reservation for retail investors
A minimum reservation of 10% of the shares is made for retail investors, ensuring their participation in the offering.
5. Price discovery
The price of shares offered in an OFS is determined through a transparent bidding process on the stock exchange platform. Bidders specify the quantity and price at which they are willing to bid.
6. Disclosure and transparency
Promoters and companies must disclose all material information regarding the OFS, including the total number of shares offered, the floor price, and other relevant details, ensuring transparency for investors.
7. Regulatory approval
Prior approval from SEBI and compliance with stock exchange regulations are mandatory before conducting an OFS. The offer document must be filed with the exchanges for their approval.
8. Settlement and execution
The OFS is executed through the stock exchange mechanism, and settlement occurs as per the exchange's settlement cycle. All transactions must comply with SEBI regulations and guidelines.
9. Prohibition on price manipulation
Any attempt to manipulate the price of shares during the bidding process or post-OFS is strictly prohibited, ensuring market integrity.
10. Compliance
Promoters, companies, and intermediaries involved in the OFS must adhere to all applicable laws, regulations, and guidelines issued by SEBI and other regulatory authorities to protect the interests of investors and maintain market credibility.
These rules and regulations collectively aim to promote fair market practices, protect investor interests, and maintain market integrity during an Offer for Sale of shares.
How to bid and apply for an OFS?
To participate in an OFS, investors need to have a Demat account. The bidding process can be done through the stockbroker's trading platform or by using other designated channels as specified by the stock exchange.
To invest in an OFS (Offer for Sale), follow these steps:
- Open a Demat account with a registered broking firm.
- Once the bidding window opens, log in to your trading account and place your bids, specifying the quantity and price at or above the floor price.
- Review and confirm your bid.
Monitor the bidding window for any updates or changes. After the bidding window closes, the seller determines the final price and allocation of shares. Allotted shares will be credited to your Demat account, such as the one with BFSL.
Offer for sale (OFS) example:
ABC company decides to conduct an OFS with a minimum share price of Rs. 150.
Investors:
- Ms. Patel: A retail investor eligible for 1500 shares.
- Infinite capital fund: An institutional investor entitled to 2000 shares.
Total supply calculation:
1. Ms. Patel's offer:
- Total supply = Limit price * Number of shares = Rs. 150 * 1500 = Rs. 225,000.
2. Infinite capital fund's offer:
- Total supply = Limit price * Number of shares = Rs. 150 * 2000 = Rs. 300,000.
Retail and institutional categories:
- Ms. Patel: Her offer falls within the retail category.
- Infinite capital fund: As an institutional investor, they are eligible for the institutional category, securing a larger share with a higher total supply.
This example illustrates the differential treatment based on investor types in an OFS, with institutional investors having the potential for a higher total supply compared to retail investors.
What is the difference between an OFS and IPO/ FPO?
While OFS, IPO (Initial Public Offering), and FPO (Follow-on Public Offering) are methods used by companies to sell shares, there are distinct differences between them.
- Nature of Shares: In an OFS, existing shareholders sell their shares to the public, whereas in an IPO or FPO, the company issues new shares to raise capital.
- Purpose: An OFS allows existing shareholders to divest their holdings, provide an exit route, or meet regulatory requirements. On the other hand, IPOs (Initial Public Offering) and FPOs are primarily aimed at raising capital for the company's expansion or other financial needs.
- Underwriting: IPOs and FPOs often involve underwriters like investment banks are involved, who guarantee the subscription of shares, ensuring that the company raises the desired capital. In an OFS, usually there is no underwriting involved causing the selling shareholders to take some risk, but some sellers may opt for underwriting to ensure a successful sale of shares.
What are the advantages of an OFS?
An Offer for Sale (OFS) offers several benefits for both sellers and investors, making it a popular mechanism in the stock market. These advantages include:
- Cost-effective: OFS is a cost-effective way for promoters or existing shareholders to sell their shares in a listed company since the process does not involve the company itself. This bypasses the expenses associated with an IPO or FPO, such as underwriting fees, legal fees, and registration expenses.
- Efficient: OFS is an efficient way for stakeholders to liquidate their holdings in a listed company and raise funds as the bidding process is carried out in a single day, and the transaction is settled within two working days.
- Quick Execution: OFS does not require a lengthy process of filing a draft offer document, getting the document approved by SEBI, and undertaking roadshows to invite bids; hence, it helps in quick execution of the transaction.
- Transparency: OFS is a transparent process because the bidding happens on a stock exchange platform, where all the details are visible to the public. The seller sets a floor price, which is the minimum price at which the shares can be bid for, and the bid data is available in real-time.
- Flexible: OFS provides sellers with the flexibility to choose the number of shares they want to sell and at what price. The seller can also decide not to sell shares if the bids do not meet their expectations.
What are the disadvantages of an OFS?
Despite its benefits, the OFS mechanism has some limitations, which include:
- Limited window to participate: The window to participate in the OFS is usually limited to one trading day, unlike in Follow-on Public Offerings (FPOs) where investors get at least three days to place their bids. This provides limited opportunity for the investors to participate in the OFS and gain an advantage of the same.
- Retail investors receive a lower allocation: According to SEBI norms, retail investors must receive at least 10% of the offer, which could be as high as 20% in the case of power supplies. However, this is significantly lower than the 35% reserved for individual investors in case of initial public offerings (IPOs).
- Limited information: Unlike IPOs, where companies are required to provide detailed information about their business, OFS does not require companies to provide any such information. This can make it difficult for investors to make informed decisions.
- Market volatility: The price of shares in an OFS is determined by market demand and supply. This can lead to high volatility in the share price, which can be risky for investors.
Things you need to consider before investing in an OFS
Before participating in an OFS, investors should carefully evaluate the following aspects:
- Investor category awareness:Investors should identify whether they fall into the retail or institutional category. This distinction determines the total supply and potential share allocation.
- Financial preparedness:Assess whether you have the required funds in your trading account. For instance, Ms. Patel should ensure she has Rs. 225,000 to support her offer.
- Demat account necessity:Verify that you have a Demat account as OFS transactions can only be conducted through this electronic format.
- Order placement timing:Orders for OFS can only be placed between 9:15 am and 3:00 pm. Investors need to submit their orders within this timeframe.
- Order type consideration:Understand the order type limitations. Only limited orders can be placed; market orders are not allowed.
- Ownership limitation recognition:Acknowledge that companies are restricted from selling more than 25% of the OFS to a single offeror, excluding mutual funds.
- Post-investment process awareness:Recognise that successful bidders can expect shares to be credited to their Demat accounts as per the trade settlement cycle.
- Comparison with Institutional Investors:Be aware of the potential for institutional investors to secure a higher total supply compared to retail investors.
Conclusion
The Offer for Sale (OFS) allows retail investors to purchase shares in publicly listed companies while enabling promoters to reduce their stakes in these firms.
Although there are both advantages and disadvantages to consider, OFS primarily increases the accessibility of shares to a broader audience.
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