What is an Offer for Sale?
- A company may resort to an Offer for Sale (OFS) when it requires additional capital to meet its goals. In an OFS, promoters of a company will dilute their stake by selling their shares to retail investors, companies, Foreign Institutional Investors (FIIs) and Qualified Institutional Buyers (QIBs) on an exchange platform.
Mechanism
- The company sets a floor price and the bidders cannot quote lesser than the floor price.
- There is no minimum limit to participate in an OFS – a buyer can even bid for a single share in the bidding process.
- However, the maximum limit for an individual investor is Rs. 2,00,000.
- Bidders can only participate if they have a demat account and trading account.
- OFS shares are generally allocated through Single clearing price mechanism or Multiple clearing price mechanism. In case of the former, all investors are allocated shares at the same price; but in case of the latter, shares are allocated to investors at a price priority basis.
- Allocation of the shares remains subject to final price discovery.
Rules and regulations concerning OFS
- It is available for only the Top 200 companies (based on market capitalisation) in the equity market.
- The company has to inform the stock exchanges at least two days prior the OFS.
- At least 25% of the shares must be reserved for mutual funds and insurance companies.
- At least 10% reservation is made for retail buyers.
Pros of investing in an OFS
- Minimal paperwork.
- Discounted price for retail investors.
- Cost effective way of investing as there are no additional charges applicable.
Cons of investing in an OFS
- Limited reservation for retail investors
- Limited bidding window
Difference between Follow-on Public Offering (FPO) and Offer for Sale (OFS)
- In FPO, companies can raise funds by issuing fresh shares or promoters can sell existing stakes. FPO stays open for three to ten days and requires considerable time for approval from SEBI.
- In OFS, only existing shares are put on the block. Only promoters or shareholders holding more than 10% of the share capital in a company can come up with this. The entire retail amount is backed by 100% margins in the form of cash and cash equivalents – the process is quick and non-allotted or partially allotted funds are given back to the trading member on the same day.
