What Is Offer for Sale (OFS) in IPO?

An Offer for Sale (OFS) is a mechanism that allows significant shareholders of listed companies to sell their stakes through a simplified auction process.

Introduced by the Securities and Exchange Board of India (SEBI) in 2012, OFS was designed to help promoters or large investors meet public shareholding norms while ensuring a transparent and efficient market.

The process is particularly beneficial for both sellers seeking liquidity and investors looking to diversify their portfolios.

How Does Offer for Sale Work?

OFS enables major shareholders, such as promoters or large investors, to sell their holdings directly to the public through stock exchanges. This method is limited to the top 200 companies by market capitalization, ensuring its use by reputed and financially stable firms.

1. Advance Notification:
   Companies planning an OFS must notify stock exchanges at least two trading days in advance.
2. Floor Price Setting:
   The selling shareholder sets a minimum acceptable price, known as the floor price, which guides investors during the bidding process.
3. Bidding Process:
   Investors place bids within the specified price range. Shares are allocated based on bids using either a single clearing price (uniform for all investors) or multiple clearing prices (prioritizing higher bids).
4. Cut-Off Price Option:
   Investors can choose to bid at the cut-off price, which eliminates the need for manual price selection during the bidding.
5. Allocation:
   Share allocation follows pre-defined rules, with reservations for institutional and retail investors. The process is completed within a single trading day.

Key Features of OFS

1. Seller Eligibility:
   Only major shareholders or promoter groups holding more than 10% of a company’s equity can initiate an OFS.
2. Company Criteria:
   OFS is restricted to the leading 200 companies by market capitalization.
3. Institutional and Retail Reservations:
   • At least 25% of shares are reserved for institutional investors like mutual funds and insurance companies.
   • At least 10% of shares are reserved for retail investors to encourage participation.
4. Discounts for Retail Investors:
   Companies may offer discounts on the floor price, typically up to 5%, making OFS attractive for small-scale investors.
5. Minimal Documentation:
   Investors only need to place bids, making the process hassle-free.
6. Time Efficiency:
   The entire process, from bidding to allocation, is completed within a single trading day.
7. Transparent Price Discovery:
   The auction mechanism ensures fair price discovery based on genuine market demand.

Regulatory Aspects of OFS

SEBI mandates several guidelines to maintain fairness and transparency:

• Price Setting:
  The floor price must be disclosed in advance, ensuring a clear benchmark for investors.
• Allocation Rules:
  Shares are allocated to investors proportionally based on their bids, ensuring equitable distribution.
• Compliance:
  Companies must adhere to public shareholding norms, with penalties imposed for non-compliance.

Example of OFS

Let’s consider ABC Company initiating an OFS at Rs 100 per share:

• Retail Investor:
  Mr. X places a bid for 5,000 shares, amounting to Rs 5,00,000.
• Institutional Investor:
  DEF Capital Fund bids for 10,000 shares, amounting to Rs 10,00,000.

Mr. X falls under the retail category and is eligible for the reserved portion. DEF Capital Fund, being an institutional investor, has greater access to shares due to its reserved allocation.

Advantages of OFS

1. Ease of Participation:
   The bidding process is straightforward, requiring minimal documentation and no additional charges beyond regular transaction fees.
2. Cost-Effectiveness:
   OFS eliminates the need for extensive paperwork, reducing transaction costs.
3. Incentives for Retail Investors:
   Discounts on the floor price make OFS a lucrative option for small-scale investors.
4. Regulatory Compliance:
   Promoters can meet SEBI’s public shareholding norms efficiently through OFS.
5. Market Stability:
   The transparent price discovery mechanism promotes confidence among market participants.

Risk Considerations for Investors

While OFS offers numerous benefits, investors should be mindful of the following risks:

• Price Volatility:
  A large-scale sell-off by promoters can lead to temporary price drops, impacting portfolio value.
• Market Sentiment:
  Promoters selling significant stakes might be perceived negatively, causing investor concerns.
• Limited Allocation:
  Retail investors may receive fewer shares due to capped reservations.

Comparing OFS with IPO and FPO

Here’s a comparative overview of OFS, Initial Public Offering (IPO), and Follow-on Public Offering (FPO):

1. Purpose:
   • OFS: Facilitates the sale of existing shares by shareholders.
   • IPO/FPO: Issues new shares to raise capital.
2. Impact on Company Capital:
   • OFS: No change in the capital base.
   • IPO/FPO: Expands the company’s capital base.
3. Duration:
   • OFS: Completed within one day.
   • IPO/FPO: Takes 3-10 days to finalize.
4. Shareholder Dilution:
   • OFS: No dilution, as existing shares are redistributed.
   • IPO/FPO: Dilutes existing ownership percentages.

Market Trends in OFS

Over the years, several prominent companies have utilized OFS for stake dilution. This method has been particularly effective for large firms looking to align with regulatory mandates while maintaining investor confidence.

Strategies for Investors

Retail investors can enhance their success in OFS participation by following these tips:

• Evaluate Fundamentals:
  Analyze the company’s financial health and growth prospects before bidding.
• Set Realistic Bids:
  Avoid overbidding to ensure alignment with your investment goals.
• Use Cut-Off Price Option:
  If uncertain, bid at the cut-off price to simplify participation.
• Monitor Notifications:
  Stay updated on OFS announcements to act promptly.

Infographic Summary

• Eligibility: Major shareholders, top 200 companies.
• Reservations: 25% for institutions, 10% for retail investors.
• Process: Auction-based with floor price and bid-based allocations.
• Advantages: Easy, cost-effective, and transparent.
• Risks: Price volatility and limited allocations for retail.

An Offer for Sale is a versatile and efficient tool that benefits both companies and investors by promoting transparency, regulatory compliance, and inclusivity.

Disclaimer – The information provided in this article, “What Is Offer for Sale (OFS) in IPO?” is for educational and informational purposes only. It does not constitute financial, legal, or investment advice. Readers are encouraged to conduct their own research and consult with a qualified financial advisor or legal professional before making any investment decisions. While we strive for accuracy, we do not guarantee the completeness or reliability of the information presented here. Market conditions and regulatory guidelines may change over time, and we disclaim any liability for errors or omissions. Investing in financial markets involves risks, and past performance is not indicative of future results.