what-is-ofs

Offer For Sale: Meaning, Checklist, Pros & Cons

Offer For Sale: Meaning, Checklist, Pros & Cons

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.

  • The rules and regulations apply to only the top 200 listed companies in the share market, and their ranking is based on market capitalization.
  • Non-promoter shareholders having more than 10% share capital are eligible to offer shares through an Offer for Sale.
  • The company has to give notice and inform the stock exchange two days before the Offer for Sale.
  • Security Exchange Board of India (SEBI) has made it compulsory that at least 25% of shares in an OFS will be reserved for insurance companies and mutual funds.
  • In addition, a 10% reservation is made for retail buyers.

Pros

  • Less Paperwork
  • The process of Offer for Sale is a system-based bidding platform that requires less paperwork from the investor. Less paperwork means more time which makes OFS a less time consuming process than others.

  • Discount
  • Retail investors are generally offered a discount on the floor price when they purchase shares through Offer for Sale. The discount retail investors get is around the 5% range.
    However, the discounted price is one of the major benefits of investing through Offer for Sale, especially for Retail investors.

  • Cost-Effective
  • When investors place the bid under Offer for Sale, there are no extra charges applicable. The additional costs are applicable only on the regular transaction ad Securities Transaction Charges already imposed for equity investments. This makes Offer for Sale a cost-effective way of investing in the equity market.

Cons

  • Retail Investors Get Limited Reservation
  • According to the SEBI guidelines, a 10% offer is reserved for retail investors. In the case of Public Sector Undertakings (PSU), the request goes up to 20%. However, the offering percentage is far lesser than the 35% reservation which retail investors get in the case of IPOs.

  • The Bidding Window is Limited
  • The issue period for an Offer for Sale does not go beyond more than a single trading day. In the case of Follow on Public Offer (FPO), the bidding window stays open for anywhere between 3-10 days.
    The issuing company has to inform the stock exchanges two banking days before the OFS. That’s why it is essential to stay updated to avoid losing good investment opportunities.

An Offer for Sale (OFS) is a process that allows owners to reduce their holding in listed companies transparently. Later on, these shares sold by the owners are offered for sale directly to the general public via a bidding process.

Any individual or retail investor can participate in an Offer for Sale. To become eligible for OFS, an investor needs to have a trading and a demat account.
They can bid for OFS directly through their online trading portal or with the help of a dealer without any requirement of documents.
The only thing an investor has to do is provide the quantity and the price they are ready to pay for the issue of OFS.

An investor needs to bid at the higher price than the floor price to get shares allocated in an Offer for Sale. A floor price means the minimum price at which investors can apply in the OFs/
Any bid lower than the floor price is not accepted for OFS. The shares of OFS are generally allocated in two different ways:
1) Single clearing price
2) Multiple clearing price
In a single clearing price, all investors get allocated shares at the same price. Whereas, in multiple clearing prices, the shares issued to investors are based on price priority.
Let’s understand with an example:
Two investors Ajay and Rahul, apply for an OFS. Ajay places a bid at Rs 30 per share, while Rahul places a bid at Rs 40 per share.
In this example, when shares will be allocated, Rahul would be given more preference than Ajay.
However, the investors have another option called the cut-off price option. A cut-off price means the lowest price at which an investor is allocated shares during an offer for sale.
Investors can apply for shares at the cut-off price without stressing about price discovery at the bidding time.

  • How many companies can apply for OFS?
  • The top 200 listed companies having strong market capitalization in the share market can apply for OFS.

  • What is single clearing and multiple clearing price?
  • In a single clearing price, all investors get allocated shares at the same price. Whereas, in multiple clearing prices, the shares issued to investors are based on price priority.

  • How to Participate in an OFS?
  • Any individual or retail investor can participate in an Offer for Sale. To become eligible for OFS, an investor needs to have a trading and a demat account.
    They can bid for OFS directly through their online trading portal or with the help of a dealer without any requirement of documents.
    The only thing an investor has to do is provide the quantity and the price they are ready to pay for the issue of OFS.