Promoters and early investors of a company usually sell their stake during IPOs. However, they can also choose to sell their shares after listing as well. This is usually done through a process known as Offer For Sale (OFS).
The preferred conventional methods include investing directly in primary markets through Initial Public Offers (IPOs) or secondary markets through buying stocks directly from exchanges & Follow-on Public Offers (FPOs). However, companies have reduced going for FPOs after the introduction of Offer For Sale (OFS). The number of companies going for an OFS issue has been increasing significantly, and the trend is expected to continue as SEBI has relaxed OFS norms.
Bearing this in mind, we are excited to introduce the FYERS OFS Portal, wherein clients can apply for the OFS issues completely online. First, let us understand what OFS is before going into further details.
Offer For Sale:
Offer For Sale (OFS) is a mechanism introduced by the Securities and Exchange Board of India (SEBI) in August 2012, whereby shareholders having more than 10% of a listed company can offer their stake to the public through the stock exchange. The purpose of OFS is to provide an exit route to promoters and help them comply with the minimum public shareholding requirement of 25%.
How does it work?
Under the OFS mechanism, promoters offer their shares to the public through the stock exchange. The shares are allocated to eligible bidders through a bidding process. Who are the eligible bidders? Any Indian Citizen who has a Demat account with the SEBI registered brokerage can bid for the OFS online using the FYERS OFS Portal. The shares are allotted on a first-come-first-served basis, subject to availability.
How is it different from IPO and FPO?
In an OFS, shares are sold by existing shareholders (with a minimum of 10% stake) to the general public/institutions, not to raise additional capital for expanding the business but to reduce the stake or exit the business altogether. However, in the case of IPO & FPO, a company usually raises capital to expand the business, increase the working capital, or pay off debts.
In OFS, the number of shares will remain the same as there is no new issue of shares. The ownership is being transferred from the promoters to the public. Only the shareholding pattern changes, and it provides liquidity to the secondary market. Whereas in an IPO or FPO, the number of overall shares increases.
Another key difference is that, in an OFS, shares are not sold through a book-building process. As there is no price discovery involved, Investors know precisely how many shares they will be getting and at what price. This makes OFS a more attractive option for companies who want to avoid the volatility associated with IPOs/FPOs.
Is there any minimum bid value in OFS?
The minimum bid quantity you can bid is usually 1, and the maximum bid value set by the exchange in the retail category is ₹2 Lakhs. If the value of bids across exchanges from a retail investor exceeds ₹2 Lakhs, then these bids will be considered as invalid.
Benefits of Offer For Sale:
- OFS helps the companies comply with SEBI's minimum public shareholding requirements.
- OFS enables promoters or significant shareholders (10%>) of listed companies to exit by raising capital from the public.
- An OFS can be an excellent opportunity to invest in a company as the issue price (Floor price) will be set at a discount to the prevailing price, i.e., the current market price.
- After the OFS, the number of secondary shares increases resulting in high liquidity and volumes.
- Unlike with IPOs & FPOs, no minimum amount is specified for participating in an OFS. You can bid even for a single share through the OFS mechanism.
- The liquidity of the OFS stock in the secondary market will increase as the public shareholding increases.
Risks associated with Offer For Sale:
- As the OFS is a route that the promoters exercise to sell off their shares, you as an investor must be extra careful before applying for the OFS as it might be a ploy of the promoters to book profits in an overvalued company.
- Unlike IPO and FPO, the Securities Transaction Tax (STT) will be applicable in OFS.
- It is allowed to modify bids backed by 100% margins at any time during the OFS market hours (refer to this article). Nevertheless, those with zero percent margin can only modify the price and quantity upwards. Such bids cannot be canceled.
- In the short term, an OFS might result in a decrease in share price as the retailers might be alarmed if the promoter/s exit their stake in the company.
- You cannot bid for more than ₹2,00,000 in an OFS issue.
Procedure to apply for an OFS:
Earlier, the procedure for applying to an OFS was offline, wherein you had to fill in the forms and physically submit the documents. However, with today's online space, to make your experience seamless, we have introduced an online portal exclusively for OFS where you can complete the process in under 2 minutes. To know the step-by-step procedure to apply for an OFS issue, refer to this article.
For the library of FAQs for OFS, click here.
Conclusion:
An Offer For Sale (OFS) could be an excellent opportunity to invest in reasonably priced stocks. However, like any other public issue, you must keep in mind that there are also risks involved, and we highly recommend that you, as an investor to, do your research before applying for such an issue because you never know why big shareholders are selling. Using conventional wisdom, it is fair to assume that insiders know more about a company's affairs than retail investors. Hence, it is important to do a fair bit of due diligence before investing. We at FYERS always focus on enhancing our customers' awareness and overall investing experience. More exciting announcements coming your way, Stay Tuned!
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