What is OFS (offer For Sale)

A company dilutes its stakes by offering shares to the general public to raise funds, and these funds are used for the growth and technological advancement of the company, and this process is known as IPO (Initial Public Offering).

However, if a company needs furthermore funds, it picks the OFS (Offer For Sale) way to generate more funds.

What is OFS in Share Market?

An Offer for Sale is a mechanism first introduced by the Securities and Exchange Board of India (SEBI) in 2012. Unlike IPO, this mechanism allows promoters to dilute their stakes and raise additional funds.

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.

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 in an OFS?

First things first, you need a Demat account and trading account to bid for OFS.

You can bid through your online trading portal or go offline with a dealer's help.

Promoters fix a floor price and investors must bid at or above the floor price.

There is no documentation required to bid for an Offer for Sale. You just need to decide the number of shares and the price you are willing to bid. There are two ways of allotting shares through the OFS method - single clearing price and multiple clearing prices. In single clearing price, shares are allocated to every investor at the same price, but in multiple clearing prices, shares are allocated by prioritising the highest bid of the shares.

For example, Texico Pvt. Limited's allocation is at multiple clearing prices and the highest bid is for 700, followed by 650, 630, 615, and so on. Then the person who has placed the bid for 700 will be given the priority for shares allotment, followed by the others.

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.

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Frequently Asked Questions (FAQs)

OFS stands for Offer for Sale, which is a method of selling shares of a listed company through the exchange platform. The existing shareholders, such as promoters or investors, can sell their shares to the public at a predetermined price or through a bidding process. The OFS mechanism is faster and simpler than other methods of share sale, such as follow-on public offer (FPO) or qualified institutional placement (QIP).

Here are the benefits of OFS in the share market in brief points:

  1. Compliance: Helps sellers meet SEBI's public shareholding requirements.
  2. Discounted Acquisition: Buyers can acquire shares at a discounted price.
  3. Liquidity and Transparency: Enhances market liquidity and transparency.
  4. Cost and Time Efficiency: Reduces time and cost in share trading.
  5. Streamlined Process: Eliminates the need for draft papers and SEBI approvals.

Only promoters or shareholders holding more than 10 percent of the share capital in a company can come up with an OFS. The mechanism is available to 200 top companies in terms of market capitalisation.

Some of the rules of OFS are:

  1. Advance Notice: Sellers notify the exchange 2 days ahead.
  2. Price Disclosure: Must state a floor price.
  3. Single-Day Window: Bidding open for 1 day.
  4. Price Priority: Allocation based on price.
  5. Retail Margin: Retail investors need 100% cash margin.

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