A private company rolls out an Initial Public Offer (IPO) to raise funds for expansion. It is the only way for companies to get additional funds for the growth in terms of a new product launch or infrastructure. However, the financial woes of the company do not end here. There comes a situation when a company is not able to raise enough funds through IPO to meet its expenditures. It is a time when a company may decide to go for an Offer for Sale (OFS).
What is Offer for Sale in Stock Market?
An offer for sale is basically a mechanism where the promoters of the company decrease their holding in the company by way of offering for sale to the public. The selling of shares available in the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) is carried out in a transparent manner through the bidding platform of stock exchanges.
In an OFS, the promoters of the company who wish to dilute their shares are termed as the ‘Sellers’ and the participants such as the individuals, QIBs, HUF are etc are known as the ‘Buyers’. Furthermore, there are no additional charges required to be paid to place the bids under an OFS. However, the transactions charges, securities transaction tax (STT) would be levied for the OFS segment.
This mechanism was introduced in the year 2012 by the securities market regulator Securities and Exchange Board of India (SEBI). The main objective behind rolling out of the OFS was to make it a hassle-free task for the promoters of the public companies to decrease their holdings from the publicly-traded companies.
It is one of the easiest ways for the public-listed companies to accumulate funds by way of selling the shares when compared to the Follow-on Public Offer (FPO). An FPO is essentially a process where a company issues the new shares to the existing shareholders of the company.
Who Can Invest or Participate in Offer for Sale?
Here is the list of investors who can participate in an offer for sale mechanism:
- Retail investors
- Insurance companies
- Mutual funds
- Qualified Institutional Buyers (QIBs)
- Non-Resident Indians (NRIs)
- Foreign Portfolio Investors (FPIs)
- Trusts, Hindu Undivided Families (HUFs), Body Corporates, Proprietary
How to Bid in Offer for Sale?
An individual has to enter into the process of bidding in order to get the shares through OFS. For this purpose, a floor price is set by the company. The buyers are not allowed to bid at a price below the floor price. A floor price is basically the price above which an individual cannot place their orders. It is important that the floor price must be offered by the promoters on T-2/T-1 day (Here T is the day of OFS). After the bids are placed, then the shares are allocated to the buyers. There is no minimum limit prescribed by the company to bid or participate in an OFS. A buyer can even bid for a single share also. However, if a lot size specified by the promoters in the OFS announcement notice, then the order which is placed in the specified lot size will only be accepted by the stock exchange.
How to Apply for Offer for Sale?
First of all, it is important to note that an individual must have a trading and demat account to apply for an OFS. If you are an individual investor, then you can only apply in the retail category of the OFS. In this particular category, the total bid value must not exceed Rs 2 lakh. If it exceeds the total bid value then you are not eligible to bid for an OFS. Only limit orders can be placed when bidding for OFS.
It is also important to know that according to the guidelines issued by the SEBI, the bids carried out by the investors must be backed by the 100% cash upfront margin, otherwise, the bid will be rejected by the stock exchange due to the insufficient collateral.
The discount is available for the retail investors provided prior notice is given in an OFS announcement on the T-2 day. The discount that will be provided to the retail investors will be either on the bid price or on the final allotment price. If in case the zero or the partial allotment is made, then the refunds will be made on the same day itself.
Furthermore, according to the guidelines by the SEBI, it is necessary for the sellers or promoters to provide a minimum 10% reservation to the retail investors. Besides the retail investors, a minimum of 25% of the shares offered in an OFS is reserved for the mutual funds and insurance companies.
Advantages of Offer for Sale
- A minimum amount of paperwork or formalities as it is a system based bidding platform.
- Due to the automated bidding process, precious time is saved when it comes to sharing allocation. The shares are allotted in T+1 day.
- It is cost effective because for placing the bids, no additional charges are applicable.
- The retail investors are offered the 10% discount on the floor price for the purpose of purchasing the shares through the OFS.
Disadvantages of Offer for Sale
- Minimum of 10% floor price is reserved for the retail investors, which is too less when compared with the IPOs where around 35% reservation is made for the retail investors.
- The issue period of the OFS cannot exceed by more than one day. However, in the FPO, the issue period is opened for around 2-10 days.
Difference Between OFS and FPO
Most of the people tend to get confused between the Offer for Sale and Follow-On Public Offer (FPO). However, there is a big difference between the two terms, which are as follows:
- Objective: The main objective of issuing OFS is to raise the money by diluting or selling the shares which are owned by the shareholders of the company. On the other hand, FPO means raising money by issuing the shares to the existing shareholders of the company.
- Time: OFS is carried out in a single trading session, whereas FPO lasts for 3-5 days.
- Price: In OFS, a floor price is defined by the company beyond which bidding is not allowed. In FPO, a price band is defined by the company within which the bids will be rejected.
- Application: The bid application for an OFS is made on the day of sale. On the other hand, the application for the FPO is made by the investors in advance.
- Multiple Bids: In OFS, multiple bids are allowed, whereas it is not the case in FPO.
- Paperwork: No formal paperwork is allowed in OFS. In the case of the FPO, a company has to issue a prospectus and take approval from the SEBI.
- Charges: STT and brokerage charges are required to be paid in OFS. SEBI filing fees are to be paid in FPO.
It is crystal-clear that an OFS is one of the most simple and best ways for the promoters of the companies to sell or dilute shareholdings in the public company and raise the funds. Furthermore, bidding and applying for an OFS is a hassle-free task. Hence, if the company is performing well over the years, then there is no disadvantage in participating in an OFS.