Offer for Sale (OFS)

The Offer to Sell (OFS) is a convenient method of selling shares for listed companies through the exchange platform. OFS was first introduced by India's securities regulator, SEBI, in 2012 to make it simple for founders of listed companies to reduce their stakes and meet minimum public shareholding standards by June 2013.

Publicly traded companies have widely adopted government and private methods to join the SEBI Order. Now, the Government uses this method to divest its stakes in public sector companies.

What Is An Offer For Sale?

Offer for sale meaning/OFS is a quick and convenient way of selling shares through the trading platform for publicly traded companies. A company can use an Offer for Sale (OFS) when it needs additional capital to achieve its objectives. The promoters dilute their holdings and use OFS to sell shares to retail investors, corporations, QIBs - Qualified Institutional Buyers, and FIIs - Foreign Institutional Investors on an exchange platform.

Publicly traded private and state-owned companies have widely adopted this method, and the government later sold its stakes in public sector companies.

How Does an Offer For Sale Work?

Now you know what is OFS lets understand how OFS works. An Offer for Sale (OFS) is a process where a company or its major shareholders sell their shares to the public. Here's how it works:

1. Announcement: The seller announces the OFS and sets a minimum price (floor price) for the shares on the stock exchange.

2. Bidding: Investors can place bids for the shares at or above this minimum price during the bidding period.

3. Allocation: The seller reviews the bids and decides how many shares each bidder gets based on their offers.

4. Settlement: Successful bidders have the shares credited to their accounts and the payment is deducted from their bank accounts.

If bids are lower than the floor price, OFS fails and shares stay with the seller. OFS helps companies raise funds efficiently and meets regulatory requirements for public shareholding.
 

Key Features of an Offer for Sale

• The OFS mechanism is only used when existing shares are added to the block, and only shareholders owning more than 10% of the share capital of a company can propose such an issue.
• OFS is accessible to 200 leading companies by market capitalization, and 25% of the shares offered are kept for Insurance Corporations and Mutual Funds. Other than these two, no other bidder can be awarded more than 25% of the bid amount.
• At least 10% of the offering size is for retail investors. A seller may offer retail investors a discount on the offer price or the final price. The OFS counter is only open for one day, and the company must notify the stock exchanges at least two days before the OFS. 
• Compared to FPO - Follow-On Public Offering (FPO), OFS is better, as FPSs are open for 3 to 10 days and is time-consuming as it requires submitting projects and procuring approvals from SEBI. At OFS, all retail offer amounts are 100% hedged by cash and cash equivalent margins. The process is fast, and excess funds are returned to the trading participant the same day after 6:00 p.m. due to non-allotment or partial allocation.
• 100% margin offers are subject to change during OFS business hours. However, those with a zero percent margin can only be changed upwards for price and quantity revision or modification. No cancellation is allowed on these offers.
• Offers below the minimum price will be rejected, and the assignment remains subject to the final price discovery. On the contrary, an FPO creates a price range within which bids are placed. The minimum price typically prevails at a discount, but this can sometimes get risky. 

How to Participate in an OFS?

Anyone can take part in an Offer for Sale (OFS), which is a way for companies to sell their shares to the public. To be eligible, you need to have both a trading account and a demat account.

You can easily participate in an OFS through your online trading platform or with the help of a dealer. No extra documents are needed for this process.

All you need to do is specify how many shares you want to buy and the price you're willing to pay. It’s a straightforward way for individuals and retail investors to buy shares directly from companies, without a lot of paperwork or complex requirements.

What is The Bidding Process in OFS?

In an Offer for Sale (OFS), investors must bid above a set minimum price, known as the floor price, to be considered for shares. Bids below this price aren’t accepted. Shares in an OFS can be allocated in two ways:

1. Single Clearing Price: Everyone who bids gets shares at the same price.
2. Multiple Clearing Prices: Shares are allocated based on the highest prices first.

For example, if Ajay bids ₹30 per share and Rahul bids ₹40, Rahul will get shares first due to his higher bid. Investors also have the option to bid at a cut-off price, which is the lowest price at which shares are allocated. This means they don’t need to worry about getting the price right at the time of bidding; they’ll get shares at the final cut-off price if their bid is above it.

Offer For Sale Example

Company XYZ has a minimum share price of Rs. 100.

Mr. Roy is a retail investor and will be eligible for 2000 shares, whereas Roy and the company, an institutional investor, will be entitled to 2001 shares. 

Total Supply For Mr. Roy will be = Limit Price * Number of Shares = Rs 100 * 2000 = Rs. 200,000.

Total Supply For Roy and Company = Limit Price * Number of Shares = Rs 100 * 2001 

= Rs 2,00,000.010.

Mr. Roy’s offer will be equal to or less than Rs 2 lakhs which can be admitted in the retail category. 

Roy and the company’s offer is only Rs 10 higher than Mr. Roy, and it will be eligible for this as it is an Institutional Investor.

What Are Some of the Benefits of an OFS?

OFS has many benefits, as retail investors can get a discount on the minimum price when applying for OFS shares.

• Retail buyers who choose to invest through OFS can benefit from a rebate of up to 5%.
• OFS is only operational for one day (called the offer for sale today), which means it is a more convenient and time-saving option for retail investors.
• The best feature about OFS is that there are no additional fees besides the STT or securities transaction fees that apply to any stock investment.

Things You Need to Consider Before Investing in OFS?

You can only put money in an offer to sell through a representative, broker, or intermediary, and OFS cannot be requested via physical forms. Therefore, a Demat account is mandatory to invest in an OFS. People investing in OFS must have access to the required funds in their accounts to qualify for the offers. 

For example, the order value of Mr. Roy is Rs 2 lakhs, so he should have Rs 2 Lakhs in his trading account before placing an order.

• Orders for OFS can only be placed between 9:15 am and 3:00 pm. Orders cannot be changed or placed after 15:00 hours.
• When applying for an OFS, only limited orders can be placed. Market orders will be disqualified. The companies are not permitted to sell more than 25% OFS to one offeror, except mutual funds.
• The successful bidders' shares will be credited to their dematerialization account within T + 2 days.

Key Takeaways

To conclude, OFS is a convenient, money-saving, and time-saving option using which retail investors can buy shares in publicly traded companies and promoters can mitigate their stakes in publicly traded firms.

It has pros and cons, but unlike other means of trading, OFS is quite a beneficial instrument that offers discounts and makes a share accessible on a wider platform.