How does an offer for sale work?
OFS operates in a time-bound, transparent structure through the stock exchange mechanism. The process allows investors to place bids at or above the floor price during the designated bidding window.
Announcement of OFS details
The company notifies the stock exchanges at least one day in advance, disclosing the number of shares, floor price, and reservation details.
Bidding window opens
OFS is conducted over a single trading day. Investors place their bids through their brokers during market hours.
Retail and institutional participation
A portion is reserved for retail investors, while institutional buyers can place bids. Each category is allocated separately.
Price discovery process
Investors place bids at or above the floor price. Allocation is made based on price priority or proportionally, depending on demand.
Settlement and allotment
Successful bidders receive shares in their demat accounts. Settlement is done on a T+1 basis, ensuring quick transfer of ownership.
Features of offer for sale (OFS)
OFS is designed to be simple, efficient, and accessible for both institutional and retail investors. It enables promoters to reduce their holdings without diluting overall equity.
Stock exchange platform
OFS takes place on NSE or BSE platforms, ensuring regulated and structured execution of transactions within a defined timeline.
Minimum public shareholding compliance
Listed companies use OFS to meet SEBI’s minimum 25% public shareholding requirement without initiating new equity issuance.
No new shares issued
OFS involves transfer of existing shares from promoters or shareholders to the public, with no dilution of the company’s equity base.
Time-bound bidding window
The bidding takes place during market hours on a specific day, usually between 9:15 AM and 3:30 PM, and follows exchange rules.
Difference between OFS and IPO/FPO
The critical difference between an IPO and an OFS in share market is that in an IPO, the company dilutes its stakes to raise funds, whereas, in an OFS, the promoters dilute their stakes, which they already own.
The process of raising funds through IPO is cumbersome for the company, as it has to go through all the listing formalities, comply with SEBI’s norms, and then finally shares are allotted to investors in the primary market, but for OFS in share market, the process is relatively hassle-free. The company has to inform SEBI two days prior to their OFS in share market. The NSE disseminates information regarding companies coming for the OFS process on the official NSE website.
Another similar term that sparks confusion among investors is FPO.
FPO (Follow-on Public Offer) is a process where already listed companies issue fresh shares to their existing or new investors to raise capital.
Let’s understand this by an example. In the year 2021, XYZ ltd. raised capital by issuing 1 lac shares through IPO, but after a few months, they realized that the raised funds are not sufficient to expand the business. In this case, they will want to raise more money by issuing new shares to the investors. Now because they are already listed, they don’t need to go through the process of getting listed on stock exchanges.
Factors | IPO | FPO | OFS |
---|
Company listing | Needs to be done for the IPO process. | | Already listed companies go for OFS mechanism. |
Dilution of shares | The company dilutes its stakes. | The company dilutes its stakes. | Promoters dilute its stakes. |
Objective | To get listed as a public company and raise funds for growth and expansion. | To fulfill the inadequacy of capital for investments for expansion. | To fulfill the inadequacy of capital for investments for expansion by diluting promoter’s shares. |
Who can bid for OFS?
From retail investors to institutions, anyone can apply for an OFS, but for retail investors, the bid amount should not exceed more than 2 lacs. If the amount exceeds more than 2 lacs, the retail investor is not eligible for the OFS.
SEBI allows only the top 200 listed companies to go for an OFS. In an Offer for Sale, it is mandated to reserve 25% of the shares offered for mutual funds and institutions and 10% for retail investors. Non-promoters holding more than 10% can also dilute their stake through the OFS mechanism.
How to bid and apply in an OFS?
Participating in an OFS involves using a trading account and submitting bids through your stockbroker. The process is straightforward and mirrors equity order placement with some key differences.
Check OFS announcement
Track company announcements and broker updates regarding OFS timing, floor price, and eligibility to participate in the offering.
Log into trading account
Access your online trading platform or contact your broker to submit bids during the OFS bidding window on the scheduled date.
Select investor category
Choose your investor category—retail or institutional—based on investment value. Retail quota is reserved for bids up to Rs.2 lakh.
Submit bid and funds
Place your bid at the desired price, ensuring availability of funds in your trading account. Bids at or above floor price are considered.
What are the advantages of an OFS?
OFS offers benefits for both the company and investors, especially in terms of simplicity, cost, and compliance. It helps improve shareholding distribution and market transparency.
Regulatory compliance
OFS allows companies to meet SEBI’s public shareholding rules without engaging in complex capital restructuring or follow-on offers.
Lower transaction costs
Unlike public offerings, OFS involves no underwriting fees or marketing expenses, reducing the overall cost for the promoter.
Transparent process
Bids are placed through the exchange, with real-time visibility and price discovery, ensuring fair allocation to all investor categories.
Retail participation
With dedicated reservation for retail investors, OFS ensures inclusivity and allows broader investor participation in company holdings.
What are the disadvantages of an OFS?
While efficient, OFS has certain drawbacks that may limit its attractiveness for all investor types or for companies with specific requirements.
No price negotiation
Since the process is based on floor price bidding, investors cannot negotiate directly with the seller for better pricing.
Short application window
The OFS bidding window is open for a single trading day, limiting the time available for retail investors to analyse and act.
No assured allotment
Participation does not guarantee allocation, especially in oversubscribed issues, leading to possible investor disappointment.
Limited to listed companies
Only promoters of listed entities can use OFS, excluding private companies or firms looking to raise fresh capital through public issue.
Things you need to consider before investing in an OFS
Investors should evaluate key factors before applying in an OFS. This includes company fundamentals, market timing, and pricing.
Review company performance
Analyse the company’s financial health, earnings history, and future prospects to ensure the offer aligns with your investment objectives.
Understand the floor price
Compare the floor price to the prevailing market price to assess whether the offering provides reasonable value or carries a premium.
Check eligibility and timing
Ensure you qualify under the correct category and act within the bidding window, as late entries are not entertained.
Evaluate allocation risk
Prepare for possible non-allotment due to high demand, especially in oversubscribed offerings. Have a backup plan for unutilised funds.
Rules and regulations in an offer for sale
SEBI has laid out specific guidelines for the conduct of OFS to ensure fairness, transparency, and equal access for all classes of investors.
Advance notice to exchanges
Companies must inform stock exchanges one trading day prior, stating quantity, floor price, and investor reservation details.
Retail reservation
At least 10% of the offered shares are reserved for retail investors, ensuring accessibility to smaller participants.
Single-day bidding
OFS takes place over one trading day, limiting market disruption and allowing for swift execution of the transaction.
Minimum promoter stake
After the OFS, promoters must continue holding at least 75% in total or meet minimum shareholding norms as per SEBI.
When to invest in an OFS?
When promoters are bullish on their own company, they increase their stakes in it. However, when the company needs raising funds without diluting the company's stakes, the promoters come forward to dilute their stakes to raise more funds.
The right time to invest in an OFS in share market is when the company has strong financials and there are foreseeable growth opportunities in the company.
How is it different from buying shares from the normal market?
The OFS in share market is an order collection system where the buyer needs to provide a bid. Promoters must fix a floor price as mandated by the SEBI, below which bids cannot be placed. Unlike normal shares, investors are not allowed to sell the allotted shares on the OFS platform.
Final words
A hassle-free, affordable, and quicker alternative for a retail investor to purchase shares from a publicly traded firm is through an offer for sale. Similarly, it is an easy and practical way for promoters to reduce their ownership shares in a listed firm.