Offer for Sale or simply OFS is one of the most transparent 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 what if you could buy stocks directly from the owners of the company? This is exactly how an offer for sale works.
What is Offer for Sale? – Meaning of OFS
Offer for Sale (OFS) is when the promoters i.e. owners of a listed company sell their shares to the general public. It is a transparent process which takes place on the stock exchange. But any random company cannot put out an offer for sale. Only the top 200 companies as per market capitalisation can initiate an offer for sale.
Let us understand the meaning of an offer for sale with this simple example.
Say 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 of the watch. But, there’s a catch. The 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 offer for sale is like buying the watch directly from the Titan showroom. Hence, in an offer for sale, you are buying shares directly from its promoters. You can also buy the same stock from the market but without the discount. Whereas in an offer for sale, shares are often offered at a discount to the market price.
Offer for Sale is extremely popular among Public Sector Units (PSUs). It helps government meet its disinvestment targets. A PSU offer for sale is generally provided at a discount to retail investors.
Unlike IPOs or FPOs, the concept of offer for sale (OFS) is fairly new for Indian investors. The Securities and Exchange Board of India (SEBI) introduced offer for sale 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 offer for sale. But now, any shareholder holding more than 10% shares can offer their shares for sale. The best thing about offer for sale is that usually shares are offered to investors at a 5% discount. However, providing a discount is not compulsory. It is strictly at the management’s discretion.
Watch the below video in Hindi to learn what is an offer for sale
Now you must be wondering, why do promoters sell their shares? Are they not confident in the company’s future? Is an offer for sale a red flag for investors? Well, let’s find out.
Reasons for an Offer for Sale
Promoters are owners of the company. They invest their capital, time and efforts to establish the company. So, why would they sell their stake? Does an offer for sale mean that the promoters are no longer interested in the company? Not Necessarily. Promoters can sell their shares via an offer for sale 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 has no other option than to offer 5% shares via an offer for sale to comply with the 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 can initiate an offer for sale.
- 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 for an offer for sale 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, an offer for sale can be an opportunity for promoters to abandon a sinking ship!
Hence, before investing in an offer for sale, , 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 Offer for Sale (OFS) work? – Step-By-Step Approach to Offer for Sale
The simplicity and cost effectiveness of an offer for sale 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.
Watch this video to how what is a red herring prospectus and the process of launching an IPO
But there are no such requirements for an offer for sale. Here’s how an offer for sale works –
- Promoters of the company decide on selling their stocks through an offer for sale.
- This information is communicated to the exchanges minimum two days prior to the offer for sale. This is compulsory.
- The company announces the offer for sale date. Unlike IPOs, offer for sale is only open for 1 trading day.
- The 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 offer for sale below the floor price.
- For example: Steel Authority of India Limited (SAIL)initiated an offer for sale 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’s offer for sale 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 investors in an offer for sale.
- 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.
- The total value of Ram’s bid = Cut off price * No of shares = Rs 10 * 20,000 = Rs 2,00,000
- The total value of Shyam’s bid = Cut off price * No of shares = Rs 10 *20,001 = Rs 2,00,010
The total value of Ram’s bid is less than Rs 2 Lakhs. Hence, he will qualify under retail category. And while Shyam’s bid is just Rs 10 more than Rs 2 Lakhs, he will qualify as a non-retail investor.
Other non-retail institutional investors in an offer for sale include:
As per SEBI, in an offer for sale, 25% of the issue size must be reserved for institutional investors like mutual funds, insurance companies etc. And 10% must be reserved for retail investors (like Ram).
By qualifying as non-retail investor, Shyam has reduced his allotment chances as he faces tough competition from institutional investors. Also, he will not be applicable for the 10% retail reservation. Hence, while applying for an offer for sale, ensure that the total value of your bid is less than Rs 2 Lakhs to avail the 10% retail investor quota.
Price Discovery in an Offer for Sale – OFS Price Discovery
Price discovery in an offer for sale is highly transparent as the stock is listed on the exchange. Since the current market price of the stock is freely available, 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 offer for sale 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 unlike an IPO where companies have the freedom to decide the floor price as the stock is not yet available in the public domain.
For example: If ABC Ltd was coming up with an IPO, it can very well put the offer price at Rs 50. This is because investors have nothing to compare this against. So, they are not able to decide if the stock is undervalued or overvalued.
Allotment of Shares in an Offer for Sale
Shares in an offer for sale 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. While Life Insurance Corporation of India (LIC) bids for 2,00,000 shares at Rs 66 per share. In single clearing price offer for sale, both Ram and LIC will get SAIL shares at the same price.
- Multiple Clearing Price– Here, different investors get shares at different prices based on quoted bid price. For example, LIC will be given preference since their bid price and quantity both are higher than Ram.
- Cut off Price Option– In this 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 offer for sale, promoters sell their shares to the general public.||In an IPO, the company sells its shares to the general public for the first time.|
|Total No of Shares||In an offer for sale, no new shares are issued. Existing shares are only transferred from promoters to investors.||In an IPO, new shares are issued in the market. This increases the free float of the company.|
|Recipient of Sale Proceeds||In an offer for sale, the sale proceeds are received by the promoters.||In an IPO, the company receives the sale proceeds.|
|Market Regulator’s Approval||Prior approval of market regulators is not required in an offer for sale. But the company must inform the exchange two days prior to an offer for sale.||Without SEBI’s approval, companies cannot launch an IPO.|
|Trading Hours||An offer for sale is open for only 1 trading day||An IPO is open for 3-4 trading days.|
|Price Discovery||Price discovery is highly Transparent in an offer for sale||Price discovery is 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 Offer for Sale – 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 an offer for sale through physical forms. So, a Demat account is compulsory for investing in an offer for sale.
- 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.
- Offer for sale 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 offer for sale, you can place only limit orders. Market orders are not allowed.
- Promoters cannot sell more than 25% of the offer for sale size to a single bidder except for mutual funds.
- Offer for sale is also supported by Application Supported by Blocked Amount (ASBA). The unutilised amount is credited back to investors in T+1 day. So, if you apply for an offer for sale on Monday, then 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 upcoming Offer for sale opportunities. https://www1.nseindia.com/live_market/content/live_watch/offer_sale/ofs_sale.htm
- Decide which company’s offer for sale 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 offer for sale of your favourite company in seconds!
As of October 2021, nearly 25 companies have put out an offer for sale. Here’s a list of all the Offer for Sale available to investors in 2021
|Sr. No||Company Name||Offer Date||No of Shares Offered||Floor Price (Rs)||Allotment Price (Rs)|
|1||Hindustan Copper Limited||16-Sep-21||6,14,66,048||116.00||116.00|
|2||Indo Tech Transformers Limited||30-Aug-21||3,46,948||140.00||154.30|
|3||WABCO India Limited||25-Aug-21||3,42,388||6900.00||6977.00|
|4||Indostar Capital Finance Limited||20-Aug-21||61,22,752||290.00||290.00|
|5||Housing & Urban Development Corporation Limited||27-Jul-21||14,41,36,800||45.00||45.00|
|7||Orchid Pharma Limited||24-Jun-21||29,52,103||375.00||451.00|
|8||WABCO India Limited||23-Jun-21||5,85,000||6550.00||6700.00|
|9||JSW Ispat Special Products Limited||15-Jun-21||8,95,15,389||27.00||35.05|
|10||Accelya Solutions India Limited||10-Jun-21||19,63,595||910.00||1131.00|
|11||Axis Bank Limited||19-May-21||5,22,70,711||680.00||701.55|
|12||Federal-Mogul Goetze (India) Limited||26-Apr-21||99,68,580||250.00||260.10|
|13||Hathway Cable & Datacom Limited||26-Apr-21||18,48,99,006||21.50||21.50|
|15||Den Networks Limited||26-Mar-21||4,99,36,543||48.50||48.50|
|16||Hathway Cable & Datacom Limited||26-Mar-21||30,41,85,469||25.25||25.25|
|17||WABCO India Limited||25-Mar-21||21,63,908||5450.00||5662.00|
|18||Rail Vikas Nigam Limited||24-Mar-21||19,75,62,294||27.50||27.50|
|19||Tata Communications Limited||16-Mar-21||4,13,52,196||1161.00||1172.25|
|20||Ircon International Limited||03-Mar-21||5,26,68,882||88.00||89.75|
|22||Federal-Mogul Goetze (India) Limited||25-Jan-21||1,03,52,942||305.00||305.00|
|23||Steel Authority of India Limited||14-Jan-21||36,14,20,962||64.00||65.65|
|24||Dishman Carbogen Amcis Ltd||12-Jan-21||83,57,143||140.00||140.00|
|25||Wendt (India) Limited||07-Jan-21||85,233||2200.00||2900.00|
Source: NSE India
FAQs on Offer for Sale
- What is the full form of OFS?
The full form of OFS is Offer for Sale. It is a way for the promoters of a company to sell their shares to the general public.
- What is offer for sale in the stock market?
An offer for sale in the stock market is a way for a company’s owners to sell their shares to the general public. Unlike an IPO, no new shares are created in an offer for sale. Rather existing shares are transferred from owners to general public.
- Can only promoters sell their stake in an offer for sale?
Earlier only promoters were allowed to sell their stake in an offer for sale. But now any shareholder holding 10% stake in the company can participate in an offer for sale.
- What is the settlement period for an offer for sale?
The settlement of shares in an offer for sale takes place in T+1 day for retail and institutional investors with 100% margin. For institutional investors with no margin, the settlement takes place in T+2 days.
- How long is an offer for sale open for subscription?
An offer for sale is open for only 1 trading day between 9.15 pm to 3 pm. Check out the latest offer for sale here.
- Who is classified as a retail investor in an offer for sale?
An investor’s whose total bid value is equal or less than Rs 2 Lakhs is classified as a retail investor. Retail investors in an offer for sale enjoy 10% reservation.
- Is offer for sale bad?
Offer for sale is not always a bad thing. Remember, the promoters of the company are like any other asset owner. They have invested their capital and time in the company. So, it isn’t a red flag if they decide to book partial profits or use the proceeds for personal emergencies.
- Can you invest in an offer for sale without a Demat account?
No, a Demat account is compulsory while subscribing to an offer for sale. Open a Demat account absolutely FREE with the best broker in India.
- What is the difference between offer for sale and private placement?
In a private placement, a company sells its shares to a select group of investors or institutions. Whereas in an offer for sale, the shares are sold to general public, at random.