What is OFS?
With the recent IPO frenzy, terms such as OFS, FPO, etc. are trending topics. OFS refers to an Offer for Sale. At times, the company may require additional funding. In such cases, the company either opts for an Offer for Sale or a Follow-on Public Offer (FPO).
Offer for Sale primarily involves the attenuation of the promoter holding of a company by selling the shares on an exchange platform. The buyers may be retail investors, foreign institutional investors, companies, qualified institutional buyers, etc.
OFS was introduced by SEBI in 2012 to aid promoters of publicly listed companies to reduce their holdings to comply with newly introduced regulations. The method is now widely used by listed entities - private as well as state-owned.
In an OFS, the company offers the shares at a minimum floor price. The buyer must apply for shares at a price equal to or more than the floor price. There is no restriction on the minimum number of shares to be applied for. Shares are allotted based on the bids placed by various buyers.
Terms and conditions w.r.t OFS:
- OFS is available only to the top 200 companies in the share market. The rankings are a function of market capitalization.
- OFS is not restricted to promoters. non-promoter shareholders holding more than 10% of share capital are also eligible.
- The company is required to intimate the exchange at least two days before the OFS.
- The OFS window is open only for a single trading day. Modification of an OFS order is allowed.
- The allocation remains subject to the final price discovery mechanism.
- SEBI has mandated that 25% of the shares are to be earmarked for Mutual Funds and Insurance Companies.
- Additionally, 10% of the shares are set aside for retail investors. An individual investor may apply in the retail category. To do so, the minimum bid value must not exceed Rs. 2 Lakhs.
- No single bidder other than mutual funds and insurance companies will be allocated more than 25% of the size of an offer for sale.
Having understood the offer for sale meaning, let’s discuss the pros and cons of OFS.
Pros of OFS
- Discount on OFS Retail investors are generally offered shares at a discount in OFS transactions. The discount may be in the range of 5% of the offerings. Thus, purchasing shares through OFS is cost-effective for retail investors.
- Minimal paperwork Unlike FPO, the paperwork involved in OFS is minimal. Thus, the process of OFS is less time-consuming and more effective.
- Cost of Investing After making an application for OFS, no additional charges are applicable. Only regular transaction charges or STT may be levied the cost of which is minimal.
Cons of OFS
- Allocation for retail investors The share of retail investors is restricted to 10% of the total offer size. In some cases, it may go up to 20%. In IPOs and FPOs, the retail share is up to 35% of the total issue. Hence, retail participation in an OFS is comparatively lower.
- Period of Issue The bidding window for an OFS is limited to a single trading day whereas IPOs and FPOs are open for 3-10 days. Thus, the window for OFS is greater. Also, the company is required to intimate the exchange two days before the issue. Hence, awareness regarding the OFS tends to be lesser.
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Frequently Asked Questions
Typically, there are two methods of allotment -
- Single clearing price – In a single clearing price, all investors are allotted securities at the same price.
- Multiple clearing price – In multiple clearing price, securities are allotted on a priority basis. Investors can apply for shares at the cut-off price to avoid non-allotment.
Price priority is applicable when allotment is done on a multiple clearing price mechanism. The highest price bidder gets the first preference for allotment. Clearing price is the lowest price of allotment. Every bid above the clearing price is allotted securities.
Except the seller, all market participants are allowed to participate in OFS. This includes QIB, FIIs, mutual funds, individuals, HUFs, NRIs, etc.
OFS application may be made through existing trading members of the exchange on which the OFS is listed. The investors are required to submit the bid details such as the bid price and bid quantity with the trading members.