There are many ways of investing in the stock market. Typically investors prefer investing via an Initial Public Offer (IPO), Follow on Public Offer (FPO) or simply buy stocks from the exchange. But there is another way of investing in the market. This method is easy for both investors and the company. It is also a lot more transparent than an IPO. This method is known as Offer for Sale, or simply OFS.
What is Offer for Sale? – Meaning of OFS
Offer for Sale (OFS) is when the promoters (owner) of a listed company sell their shares to the general public. It is a transparent process which takes place on the stock exchange. Only the top 200 companies as per market capitalisation can initiate an OFS.
Let us understand the meaning of an OFS with this simple example.
You want to buy a watch. You have two options. You can either buy it from a random nearby shop or directly from a TITAN showroom. Both are equally accessible to you. Also there is absolutely no difference in quality.
But there’s a catch. TITAN showroom is conducting a lucky draw. So, there’s a chance that you may get a 5% discount. Will you take a chance and buy from TITAN or will you prefer the nearby shop?
In this example, TITAN is doing an offer for sale and your nearby shop is the stock market. Investing in an OFS is buying shares directly from its promoters. You can also buy the same stock from the market. But in OFS, shares are offered at a discount to the market price.
OFS is extremely popular among Public Sector Units (PSUs). It helps government meet its disinvestment targets. An OFS by PSUs is generally provided at a discount to retail investors.
Unlike IPOs or FPOs, the concept of OFS is fairly new for Indian investors. The Securities and Exchange Board of India (SEBI) introduced OFS in February 2012. This was following a guideline issued by SEBI that promoters cannot hold more than 75% stake in listed companies.
Earlier only promoters could participate in an OFS. But now, any shareholder holding more than 10% shares can offer their shares for sale. The best thing about OFS is that usually shares are offered to investors at 5% discount. However providing a discount is not a rule. It is strictly at management’s discretion.
You can also watch our video to learn more about offer for sale.
Why do Promoters Sell their Shares? – Is OFS a Red Flag?
Promoters are owners of the company. They invest their capital, time and efforts to establish the company. So, why would promoters sell their stake? Does issuing an OFS mean promoters are no longer interested in the company?
Not Necessarily. Promoters can sell their shares via an OFS for any of the following reasons:
- Government Regulations: As per SEBI, promoters cannot hold more than 75% stake in a listed company. So, a promoter holding 80% stake in the company can offer 5% shares in an OFS to simply comply with government regulations.
- Personal Reasons: Building a company is like investing in an asset. Assets are created to support you during emergencies. Similarly, even promoters might need funds for personal reasons which is why they initiate an OFS.
- Diversification: Like us, even promoters might be looking to book their profits in the company. So, they sell their stake and invest in other businesses or assets to diversify their overall portfolio.
- Abandoning a Sinking Ship: This is the only reason which raises a red flag. Promoters have inside knowledge about the business. They would be the first to know if the company is in trouble. So, OFS can be an opportunity for promoters to abandon a sinking ship!
Hence, before investing in an OFS, investors must dig deeper into the reason behind the offer for sale. Is the promoter selling its stake to meet government regulations, personal reasons or are they abandoning a sinking ship?!
How Does an OFS work? – Step-By-Step Approach to Offer for Sale
The simplicity and cost effectiveness of an OFS sets it apart from IPOs. The process to launch an IPO is quite tedious. You need to apply to SEBI, prepare red herring prospectus, appoint lead managers etc. It’s time consuming and expensive.
But there are no such requirements for an OFS. Here’s how an OFS works –
- Promoters of the company decide on selling their stocks through OFS.
- This information is communicated to the exchanges minimum two days prior to the OFS. This is compulsory.
- Company announces OFS date. Unlike IPOs, offer for sale is only open for 1 trading day.
- Company announces the floor price. This is the minimum share price at which the promoters are willing to sell their shares. You cannot bid for an OFS below the floor price.
For example: Steel Authority of India Limited (SAIL) initiated an OFS on 14th Jan 2021. The floor price was decided as Rs 64 per share. In this case, a bid of Rs 63 would be automatically rejected. You can bid Rs 64 or higher.
- Once all the bids are in, the company announces the cut off price. In the above example, the cut off price for SAIL OFS was Rs 65.65. Investors who bid below Rs 65.65 will not get allotment and their money will be refunded to their trading account.
- The investors who bid above the cut off price will receive the shares and the money will be transferred to the promoters.
Who Can Invest in an OFS? – Investors in Offer for Sale
There are two types of OFS investors.
- Retail Investors
- Institutional Investors
Retail investors are ones whose total bid value does not exceed Rs 2 Lakhs. For example: The floor price of ABC Ltd is Rs 10. Ram applies for 20,000 shares. Shyam applies for 20,001 shares.
- Total value of Ram’s bid = Cut off price * No of shares = Rs 10 * 20,000 = Rs 2,00,000
- Total value of Shyam’s bid = Cut off price * No of shares = Rs 10 *20,001 = Rs 2,00,010
Ram’s bid is less than Rs 2 Lakhs. Hence he will qualify under retail category. Shyam’s bid is just Rs 10 more than Rs 2 Lakhs. Yet he will qualify as an Institutional investor.
Institutional investors in an OFS include:
As per SEBI, in an OFS:
- 25% of the issue size must be reserved for institutional investors like mutual funds, insurance companies etc.
- 10% must be reserved for retail investors (like Ram).
By qualifying as Institutional investor, Shyam has reduced his allotment chances as faces tough competition from institutional investors. Also he will not be applicable for the 10% retail reservation.
Price Discovery in an Offer for Sale – OFS Price
Price discovery in an OFS is highly transparent as the stock is listed on the exchange. The current market price of the stock is freely available in the market. So there is very little scope of manipulation in price discovery. The promoters are unable to take undue advantage of investors by quoting exceptionally high cut off price.
For example. Let’s say ABC Ltd is currently trading in the market at Rs 20. The promoters will not launch an OFS priced at Rs 50. The logic is simple. Why will you buy ABC Ltd from the promoters at Rs 50 when you can easily buy it from the market at Rs 20?
Ideally, the cut off price is equal to the share price. Hence manipulating stock prices is not possible in an offer for sale.
This is very different from an IPO. In an IPO, the company isn’t listed on the exchange. So information on its market price is not freely nor readily available. So there’s always a scope of price manipulation. For example: ABC Ltd can put the offer price at Rs 50. Investors will not be able to decide if this is undervaluation or overvaluation.
Shares in an OFS can be allotted in three ways:
- Single Clearing Price – All investors will be allotted shares at the same price irrespective of the quantity of shares bid. This evens the playing field for retail investors.
For example: Ram bids for 1,000 shares of SAIL at Rs 65 per share. Life Insurance Corporation of India (LIC) bids for 2,00,000 shares at Rs 66 per share. In single clearing price OFS, both Ram and LIC will get SAIL shares at the same price.
- Multiple Clearing Price – Different investors get shares at different prices based on quoted bid price. Here, XYZ Mutual fund will be given preference since their bid price and quantity both are higher than Ram.
- Cut off Price Option – Investors are allotted shares at the lowest price i.e. the cut off price. Investors need not worry about the price discovery as they will get the shares at cut off price only irrespective of its discovered price.
Difference between OFS & IPO – 8 Important Differences between Offer for Sale & Initial Public Offering
To a naïve investor, offer for sale and initial public offer might seem the same. After all, they are both ways to purchase a company’s shares. But there are 8 important differences between OFS & IPO.
|Parameters||Offer for Sale (OFS)||Initial Public Offering (IPO)|
|Identity of the Seller||In an OFS, promoters are selling their shares to the general public||In an IPO, the company is selling its shares to the general public for the first time.|
|Total No of Shares||No new shares are issued. Existing shares are only transferred from ‘promoter’ to investors.||New shares are issued in the market. This increases the free float of the company.|
|Recipient of Sale Proceeds||The sale proceeds are received by the promoters.||The company receives the sale proceeds.|
|Market Regulator’s Approval||Prior approval of market regulators is not required. But the company must inform the exchange 2 days prior to an OFS.||Without SEBI’s approval, companies cannot launch an IPO.|
|Trading Hours||An OFS is open for only 1 trading day||IPO is open for 3-4 trading days.|
|Price Discovery||Highly Transparent||Opaque as lead runners decide the price band.|
|Application Process||You can subscribe to an offer for sale only through a broker. Physical applications are not allowed.||You can subscribe to an IPO either through your broker or through physical form.|
|Reservation for Retail Investors||In an offer for sale, only 10% of the issue size is reserved for retail investors.||In IPO, up to 35% of the issue size is reserved for retail investors.|
Things to Know Before Investing in an OFS – Rules of OFS – For Investors & Companies
- You can invest in an offer for sale only through a broker like Samco Securities. You cannot apply for OFS through physical forms. So, a Demat account is compulsory for investing in an OFS.
- Investors must have the entire bid amount in their trading account to qualify for bidding. For example: Ram’s order value is Rs 2 Lakhs. So, while placing the order, Ram must have Rs 2 Lakhs in his trading account.
- You can apply for an offer for sale through multiple brokers. But if the overall bid value crosses Rs 2 Lakhs, then you cannot bid as a retail investor.
- OFS orders can be placed only between 9.15 am to 3.00 pm. No OFS order can be placed or modified post 3 pm.
- While applying for an OFS, you can place only limit orders. Market orders are disqualified.
- Promoters cannot sell more than 25% of the OFS size to a single bidder except to mutual funds.
- OFS is also supported by Application Supported by Blocked Amount (ASBA). The unutilised amount is credited back to investors in T+1 days. So, if you apply for OFS on Monday, the unutilised amount will be refunded to your trading account on Tuesday.
- Shares of successful bidders are credited in their Demat account in T+2 days.
How to Apply to an Offer for Sale? – OFS Investing Process
- Visit the below site to find out about upcoming Offer for sale opportunities. https://www1.nseindia.com/live_market/content/live_watch/offer_sale/ofs_sale.htm
- Decide which company’s OFS you would like to subscribe to. Ideally you should invest in fundamentally strong companies with future growth potential. Before investing in an OFS, do study the company’s balance sheet, income and expense statements.
- Open a Demat account with Samco Securities for FREE and apply in OFS of your favourite company in seconds!