offer-for-sale

Offer For Sale (OFS): Meaning, Advantages & Disadvantages

Offer For Sale (OFS): Meaning, Advantages & Disadvantages

OFS (offer for sale) is an easier way to sell shares through the exchange platform for listed businesses. India's securities regulator Sebi introduced the OFS mechanism in 2012 to make it easier to promote publicly traded companies to reduce their holdings and adhere to the minimum public shareholding norms.
This method was widely adopted by listed companies, private and state-owned, in order to comply with the Sebi order. This route was used by the government to sell its shares in public sector companies later.

The simplicity and cost effectiveness of an OFS sets it apart from IPOs. The process to launch an IPO is quite tedious. It is necessary to submit a SEBI application, prepare a red herring prospectus and appoint lead managers. It is time-consuming and costly.
An OFS does not have to meet these requirements. This is how an OFS operates -
Promoters of the company decide to sell their stocks via OFS.
This information is sent to the exchanges at least two days before the OFS. This information is mandatory.
Company announces OFS date. Unlike IPOs and other IPOs, the offer for sale is only available for one trading day.
The floor price is announced by the company. This is the minimum price at which promoters will sell their shares. An OFS cannot be purchased at a lower price than the floor.
Steel Authority of India Limited (SAIL), for example, initiated an OFS in January 2021. The floor price was set at Rs 64 per share. A bid above Rs 64 per share would be rejected. You can place a bid of Rs 64 or more
After all bids have been received, the company will announce the price cut. The cutoff price for SAIL OFS was Rs65.65 in the above example. Investors who bid less than Rs 65.65 won't be allotted and will have their money refunded to trading accounts.
Investors who bid higher than the cut-off price will be awarded shares. The money will then be transferred to the promoters.

There are two types of OFS investors.

  • Retail Investors
  • Institutional Investors

Retail investors are those whose total bid value is less than Rs 2 Lakhs. Example: ABC Ltd's floor price is Rs 10. Ram is eligible for 20,000 shares. Shyam is eligible for 20,001 shares.
Total Ram's bid = Cutoff price * Number of shares = Rs 10 * 20,00,000.
Shyam's total bid = Cutoff price * Number of shares = Rs 10,001 = Rs 2,00,000.010.
Ram's offer is less than Rs 2. Lakhs. He will therefore be eligible under the retail category. Shyam's bid for Rs 2 Lakhs is only Rs 10 higher than Shyam's. He will still be eligible to invest as an Institutional Investors.

An OFS can be accessed by institutional investors.

  • Mutual fund companies
  • Insurance companies
  • Foreign Institutional Investors
  • Pension funds etc.

As per SEBI, in an OFS:

1) 5% must be reserved by institutional investors such as mutual funds, insurance companies, etc.
2) Retail investors like Ram must have 10%
Shyam's eligibility as an Institutional investor has decreased his chances of getting allotment. He faces stiff competition from institutional investors. He will also not be eligible for the 10% retail reservation.

1) Now that we have answered the question about how to apply to OFS shares, let's turn our attention to the benefits of OFS. Retail investors are often offered a discount on the floor price when they apply for OFS shares. Retail buyers who choose to invest via OFS could receive a discount of up to 5%.
2) OfS is also a time-saving option for retail investors.
3) You may be curious about the charges associated with applying for an offer for sale. The answer is that there are no extra charges, apart from the regular STT or securities transaction charges that apply for any equity investment.

1) According to SEBI norms, retail investors must receive at least 10% of the offer. This could be as high at 20% in the case of power supplies. However, this is significantly lower than the 35 percent reserved for individual investors in case of initial public offerings (IPOs).
2) A maximum issue time for an OFS is one trading day. FPOs, however, are open for up to 10 days. The issuing company must notify stock exchanges two banking days prior to the OFS. It is important to keep up to date in order to avoid missing out on lucrative investment tools.
Things to Know Before Investing in OFS?
You can invest in an offer for sale only through a broker like Samco Securities. OfS can't be applied for via physical forms. So, a Demat account is compulsory for investing in an OFS.
Investors must have the entire bid amount in their trading account to qualify for bidding. Ram's order value, for example, is Rs 2 Lakhs. Ram should have Rs 2 Lakhs in the trading account before he places an order.
Orders for OFS can only be placed between 9.15 AM and 3.00 PM. After 3:00 pm, OFS orders cannot be modified or placed.
While applying for an OFS, you can place only limit orders. Market orders are disqualified.
Promoters can't sell more than 25% OFS to one bidder, except for mutual funds.
Shares of successful bidders are credited in their Demat account in T+2 days.

  • What is OFS?
  • OFS (offer for sale) is an easier way to sell shares through the exchange platform for listed businesses. India's securities regulator Sebi introduced the OFS mechanism in 2012 to make it easier to promote publicly traded companies to reduce their holdings and adhere to the minimum public shareholding norms.

  • Who can invest in OFS Investors in Offers for Sale?
  • There are two types of OFS investors.
    1) Retail Investors
    2) Institutional Investors

  • What is the major disadvantage of an OFS?
  • A maximum issue time for an OFS is one trading day. FPOs, however, are open for up to 10 days. The issuing company must notify stock exchanges two banking days prior to the OFS. It is important to keep up to date in order to avoid missing out on lucrative investment tools.

Final Thoughts

A retail investor can purchase shares in publicly traded companies by placing an offer for sale. This is a cost-effective and efficient way to buy shares. Promoters can also use this method to reduce their stakes in publicly traded firms.