Offer for Sale: What is OFS and How it works?

You visit a shopping mall, and you see that your favourite brands are offering some discount for a limited period with a quote "offer for sale". What will you do? Of course, you will go there and purchase your favourite things from those stores because you are getting them on a discount now. 

Sometimes you see on the news that some company's promoters are selling their shares at a discount.

You might be wondering why they are selling their shares at a discount?

What is this offer for sale in the market, and how does it work?

Well, let's walk through it step by step.

Offer for Sale Explained:

In an offer for sale, promoters of the company dilute their own stake by selling their shares on an exchange platform through a bidding process. Sometimes companies financial problems are not solved just by an IPO, a company may need additional capital to meet its goals, so they go for OFS. 

The OFS section was earlier allowed just for the promoters or promoters' cluster entities of listed companies, to act as 'Sellers' to dilute or offload their holding to realize a minimum public property of 25%. 

However, the section has been extended to non-promoters of eligible companies holding a minimum of 10% of the share capital of the company.

How does Bidding work in an OFS?

Before selling the company's shares, promoters set a floor price (a minimum starting range of share price they are willing to sell their share at) below which they won't sell their shares, and the floor prices are less than the market price. 

Buyers cannot bid below the floor price. Once the bid for shares is placed, shares are allotted to different buyers, with no limit to purchasing the shares in the OFS; a buyer can even purchase a single share.

Generally, OFS share works in two ways:

• Single clearing price.
• Multiple clearing prices.

In single price clearing, all the investors get the shares with identical prices. But in multiple price clearing, all the investors get the shares at a price on a preference basis.

To make it clear, let's take an example, suppose two bidders Rishab and Iram bid in an OFS. Rishabh bid for a price of 50 and Iram bid for a price of 60. Whenever the shares will be allotted, Iram would be preferred over Rishab.

There is another option for the investors, a cut-off price which is offered during the OFS. A cut-off price is the lowest price that is offered to the investor during the time of the offer for sale. 

This way, the investor can simply apply for shares at the cut-off price without worrying about price discovery at the time of bidding.

How can you apply for an OFS?

To apply for an OFS, you must have a Demat account and a trading account. If you are an offline investor, you can still place your bid through a dealer. 

If you are an individual retailer investor, then your bid should not exceed more than 2 lakhs rupees. If your bid exceeds more than 2 lakhs, it will be negligible.

When Should You Invest in OFS?

To raise additional capital and to reduce the promoter's share, an offer for sale is a much simpler way to raise money than the other routes of doing the same. 

If you see a good potential and future growth in a company, then it is a good deal to invest through OFS, where you will get the shares at a lower price than the market price.

What are the Rules and Eligibilities in an OFS?

• Offer For Sale is only valid for the top 200 companies based on their market capitalization.
• Non-promoter shareholders with more than 10 percent of the share are also eligible to sell their shares.
• According to the SEBI's guidelines, 25 percent of the shares in OFS should be reserved for the insurance companies and mutual funds.
• In OFS, 10 percent of shares must be reserved for retailers.
• Before issuing a notice of OFS, promoters need to inform the stock exchange two days before announcing it. 

What are the Advantages of OFS?

The offer for sale comes with quite good advantages; some of which are as follows:

Discount for Retailers:  Retail investors also get an additional discount apart from the floor price, and the discount range is to be 5 percent. 

It is the main benefit for the retail investor to invest in OFS, but retail investors cannot ask for the discount as it is dependent on the company's promoters. 

Minimal Paper Requirements: In OFS, the entire process is based on the bidding platforms, and it requires the minimum paperwork from the investors, which makes it easier and less time-consuming.

Minimal Cost Requirements: When you place your bid under OFS, there are no additional charges required for the process. However, some equity investments such as securities transaction charges (STT) are applicable, which makes it a minimal cost of investing in the market.

What are the Disadvantages of OFS?

One cannot simply spend on the offer for sale, by just looking at the brighter side. Like two sides of every coin, the OFS also comes in with some disadvantages besides its exciting advantages.

Some of the disadvantages of OFS as follows

• Limited reservation for retail investors

SEBI guidelines state that the minimum offer to be reserved for retail investors has to be marked at 10%. However, the case with PSUs is different as this benchmark can go up to 20%, and further in the case of IPOs, this reservation goes up to 35% in totality.

• Limited bidding window

OFS has the issue period of a single trading day in contrast to FPOs that tend to remain open for three to ten days at a stretch. 

However, this information of this one day sale or OFS isn't known to small retailers or investors that are there on the stock market. But, the company that is hosting these sales is informed two banking days before the OFS goes live on the stock exchange platforms.

So, it becomes crucial for these small investors or retailers to be updated with the information of which company is holding OFS so as not to miss out on good investment opportunities. 

• OFS Investment Checklist

It is clear how offer for sale is a mechanism that helps reduce an individual's shareholdings through listed companies very straightforwardly since these shares are sold by promoters on stock exchange platforms to retailers through a bidding process. 

Conclusion

An offer of sale is a simple yet a non-hazardous way to dilute the goods the promoters or the owners own (or their shareholdings in simpler words) on a publicly listed company (companies that have been listed on the stock exchange market). 

So, if you are an investor, then purchasing shares in an OFS on a stock market is quite easy. Therefore, if a company has good potential to grow, it shouldn't shy away from participating in an OFS as many investors will be interested in participating in these sales offers, profiting the company in return.