how-to-apply-for-ofs

OFS: Meaning, How to Apply & Points to Remember

OFS: Meaning, How to Apply & Points to Remember

Generally, every company requires massive capital to conduct business on a large scale. There are several sources through which a company can generate capital. However, companies use a mix of internal accruals, debt and equity to fund growth.
In this case, a company has to launch an initial public offering (IPO) to collect funds for the first time from the equity markets.
In an IPO, the promoters have the right to dilute their holdings and can issue new equity shares. But what options do promoters have if they want to dilute an essential stake after IPO?
They can sell shares in small blocks or opt for Offering for Sales (OFS).

Offer for Sale means the promoters (owners) sell their shares to raise additional funds for the company. The primary purpose of selling shares to outside investors is to gain access to funds for various purposes, including growth and expansion.
However, the financial problems of a company going to the public do not end only with the IPO. Sometimes, a company requires additional capital to achieve its goal.That is the time when companies go for an Offer for Sale.
Offer for sale is considered a shorter and easier way to raise capital. Retail investors, foreign institutional investors, qualified institutional buyers can bid on these shares.
However, they get 25% of the bidding, which is the maximum share allocation per bidder, and there are some major reservations on the total shares:
Here are some special reservations on an Offer for Sale:
1. A minimum of 10 percent of the offered shares is booked for retail investors.
2. A minimum of 25 percent of the shares offered is booked for insurance companies and mutual funds.
With an Offer for Sale, promoters have the right to sell the company’s share directly without waiting for Initial Public Offering (IPO). In addition, shareholders who hold more than a 10 percent stake in a company are allowed to benefit from Offer for Sale.
Several government companies use this type of strategy to reduce holdings with the help of an exchange. The capital raised by the company is not transferred; instead, it is transferred to the promoter for its needs in exchange for giving up the ownership of shares.

With the arrival of electronic demat and trading accounts, it has become a lot easier for investors to apply for OFS. The technical part is not complicated, but it’s essential for an investor to get detailed information about the entire process of applying for OFS.
In the case of OFS, the bidding process is used for price discovery by the company. A retail investor can either put bids at a specific price or the cut-off price.
However, the process of applying for OFS is similar to that of an IPO book-building process. The cut-off price is decided after measuring the demand received from different investors at different price points.
The bids can be booked either with the help of a broker or through the exchange if the investor is registered. The investor interest at different price levels can be checked from the exchange’s website. The subscription demand coupled with the indicative price gives a fair idea of the demand for an OFS.

An investor has the opportunity to place bids at different price points. It is compulsory to have the total bid amount in the Demat account to get an allotment through OFS.
However, there are chances of bids changing during the day, but the final allotment is declared at the end of the day.
In case of partial allotment, the additional fund is credited to the investors on the same day. Whereas, in the case of oversubscription, the allotment is made on a proportionate basis for bids placed at the cut-off price, just like an IPO.

  • No allocation will be made if the bid price is below the floor price.
  • An OFS can be placed between the market timings, which is 9.15 AM to 3 PM.
  • According to the Security Exchange Board of India (SEBI) guidelines, a minimum of 25% of the shares on offer are reserved for mutual funds and insurance companies according to the Security Exchange Board of India (SEBI) guidelines.
  • No single bidder will be allocated more than 25% of the shares on offer except for insurance and mutual fund companies.
  • The OFS settlement is done on a trade for trade basis.
  • What special reservations are there on an Offer for Sale?
  • There are two special reservations on an Offer for Sale:
    1) A minimum of 10 percent of the offered shares is booked for retail investors.
    2) A minimum of 25 percent of the shares offered is booked for insurance companies and mutual funds.

  • What is an Offer For Sale?
  • Offer for Sale means the promoters (owners) sell their shares to raise additional funds for the company. The primary purpose of selling shares to outside investors is to gain access to funds for various purposes, including growth and expansion.

  • Which points to remember while applying for an OFS?
  • There are 4 major points to remember while applying for an OFS:
    1) No allocation will be made if the bid price is below the floor price.
    2) According to the Security Exchange Board of India (SEBI) guidelines, a minimum of 25% of the shares on offer are reserved for mutual funds and insurance companies according to the Security Exchange Board of India (SEBI) guidelines.
    3) No single bidder will be allocated more than 25% of the shares on offer except for insurance and mutual fund companies.
    4) The OFS settlement is done on a trade for trade basis.

Final Thoughts

OFS is a great way and opportunity to invest in large companies. The entire process of OFS is convenient and paperless, and retail investors are also offered a discount on the floor price if they apply and subscribe for an OFS.