What Is Offer For Sale (OFS) – Advantages & Disadvantages

An Initial Public Offering (IPO) is a method for a private company to raise capital (IPO). The firm sells shares to outside investors to raise funds for a variety of purposes. This encompasses the expansion and growth of the company. It makes it easier for listed corporations to sell shares through the exchange platform. The OFS mechanism was established in 2012 by India’s securities regulator SEBI to assist publicly traded corporations in reducing their shareholdings and adhering to minimum public ownership rules.

To comply with the SEBI directive, listed enterprises, both private and state-owned, used this strategy extensively. This method was finally employed by the government to sell its stake in public-sector companies.

The company’s financial woes, however, do not end with the IPO. A firm may require additional finances to fulfill its objectives at times. This is the point at which such businesses may decide to make an acquisition offer (OFS).

Only through a broker, you can invest in an offer for sale. Physical applications for OFS are not accepted. As a result, if you want to invest in an OFS, you’ll require a Demat account. To bid, investors must have the complete bid amount in their trading account.

You can only place an OFS order between 9:15 a.m. and 3:00 p.m. OFS orders cannot be amended or placed after 3:00 p.m. Limit orders are only accessible while submitting an OFS application. With the exception of mutual funds, promoters are not permitted to sell more than 25% of their OFS to a single bidder. Successful bidders’ shares are credited to their Demat account in T+2 days.

To obtain shares in an OFS, you must bid at a price greater than the ‘floor price.’ A floor price is the lowest price for which you can apply in the OFS. Any bid that is less than this stipulated amount will be rejected and made void.

OFS shares are typically distributed in two ways:

  1. There is only a single clearance price.
  2. A wide range of clearing prices

When a single clearing price is established, all investors get the same price for their shares. However, if there are several clearing prices, investors are assigned shares based on price precedence.

Let us now see what an Offer For Sale is in terms of its functioning?

An OFS distinguishes itself from IPOs due to its ease of usage and low cost. The process of launching an initial public offering (IPO) is time-consuming. A SEBI application, as well as the development of a red herring prospectus and the nomination of lead managers, are necessary. It takes a long time and is very expensive. These requirements do not apply to an OFS.

To dilute their ownership in an OFS, promoters of a corporation sell their shares on an exchange platform. Regular individuals, businesses, Foreign Institutional Investors (FIIs), and Qualified Institutional Buyers (QIBs) can all bid on these shares (QIBs).

This is how it works when the company’s promoters choose to sell their equity through an OFS. This data is supplied to the exchanges at least two days before the OFS. It is mandatory to give this information. The corporation announces the date of the OFS. The offer for sale, unlike IPOs and other IPOs, is only accessible for one trading day. The beginning price is announced by the company. This is the lowest price at which the promoters will sell the shares. There is no way to obtain an OFS for less than the minimum price.

Who are the persons to invest in an IPO?

OFS investors are classified into two groups:

  • Retail vs. Institutional Investing

Retail Investing: An OFS is open to any retail investor (individual investor). However, you must have both a trading and a demat account to do so. You can engage in an OFS either directly or through your online trading portal with the assistance of your dealer.

Institutional Investing: A firm or organization that invests money on behalf of its clients or members is known as an institutional investor. Institutional investors include hedge funds, mutual funds, and endowments. Institutional investors are thought to be more knowledgeable than individual investors, and they are usually subject to less regulatory scrutiny.

Retail investors can invest in both retail and non-retail categories (the Non-Institutional Investors (NII) category). According to SEBI laws, corporations must reserve at least 10% of their stock for retail investors.

It is critical to remember that the total bid from regular investors should not exceed Rs 2 lakh. In other words, a single investor can use a single account to put several bids in an OFS. The bids are nullified if an investor’s total bid amount across numerous offers exceeds Rs 2 lakh or so for any reason whatsoever, it could be.

Advantages and Disadvantages of Offer For Sale (OFS)

Let’s have a look at the benefits and downsides of OFS now that we’ve covered:

Benefits

  • Retail investors are usually granted a discount off the floor price when they apply for OFS shares. Retail investors who choose to invest through OFS may be eligible for a 5% discount.
  • Using OFS can also reduce time for retail investors.
  • You might be curious about the costs of filing a purchase proposal. There are no additional fees other than the regular STT or securities transaction charges that apply to any equity investment, according to the response.

Downsides

  • Retail investors must receive at least 10% of the offer, according to SEBI regulations. In the case of electricity supply, this may be as high as 20%. However, this is a much lower amount than the 35% set aside for regular investors in initial public offerings (IPOs).
  • An OFS can be issued in as little as one trading day. FPOs, on the other hand, have a maximum duration of ten days. Two banking days before the OFS, the issuing corporation must notify stock exchanges. It is critical to stay current in order to prevent missing out on attractive investing opportunities.

Conclusion

Companies utilize the OFS approach to obtain more capital while decreasing the holdings of promoters. This is a less difficult method of collecting funds than other possibilities. If the company has an excellent reputation and future growth potential, it is great to invest in an OFS.

An OFS enables promoters to rapidly and easily sell their stakes in a publicly traded firm. If you are an investor, purchasing shares in an OFS is also simple. If the firm has a lot of promise, there’s no reason not to join an OFS.

Ashba Rizvi
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