What is Offer For Sale (OFS)
Introduction
A private company, when in need of money, comes up with an IPO (Initial Public Offering). The company sells a portion of its shareholding to outside investors to get funds. The companies are majorly in need of money for expansion and future plans.
But the funding requirement doesn’t end with an IPO. At times, the company may require additional funds for various reasons. In such times OFS comes to the rescue. In this article, we will try to understand OFS in detail.
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What is OFS?
OFS stands for Offer for Sale. It's an easy way for promoters of the company to reduce their stake in the company by selling a part of their shareholding on stock exchange platforms. India’s securities regulator SEBI brought the OFS mechanism in 2012. This was done so that the publicly traded companies could reduce their holdings to follow minimum public shareholdings norms.
This method has become very popular among listed companies, which include private and state-owned companies. This was with the purpose of complying with SEBI orders. OFS was later on even used by the government to sell its shares in public sector companies.
How Does an OFS Work?
The process of OFS is quite simple and easy. Let’s understand how it operates: -
- Promoters of a company willing to sell their shares need to take a decision on OFS.
- This information needs to be passed to the exchange two days before OFS. This is mandatory.
- The company can then announce the OFS date. This Offer for sale is only for one trading day.
- The company announces the floor price. A floor price is the minimum price at which promoters will sell their shares. You cannot buy the OFS for less than that price.
- After the company has received bids, the company will declare a cut-off price. Those who have bid less than the cutoff price will not be allotted shares. The company would refund their money through a trading account.
- Investors who have bid above the cutoff price will get the shares allotted. The money received for this share will be transferred to the promoter’s account.
Who is allowed to Invest in OFS?
Two types of investors can invest in OFS. One is retail investors, and another is Institutional Investors.
1. Retail Investors:
Investors who invest in OFS fall into a retail category if their total bid value doesn’t exceed Rs 2 lakh.
2. Institutional Investors:
Investors who invest in OFS fall into the institutional investor's category if their total bid value exceeds 2 lakh rupees. These institutional investors can be mutual fund companies, insurance companies, foreign institutional investors, and pension funds.
3. What are the Rules and Regulations in OFS?
There are certain rules and regulations set by SEBI for OFS. Let’s understand them: -
- A demat account is compulsory to invest in OFS.
- OFS facility is only for the top 200 companies (by market capitalization) in the share market.
- Non-promoter shareholders who have more than 10% shareholding in the company can also offer shares through OFS.
- The company that is coming up with OFS needs to inform the same to the stock exchange two days before the OFS date.
- As per SEBI mandate minimum of 25% of shares offered in OFS has to be kept reserved for mutual funds and insurance companies.
- As per SEBI mandate, 10% of the reservation shall be kept in OFS for retail investors.
- In OFS, the full bid amount is backed by 100% margins, which is in the form of cash and cash equivalent.
- OFS orders can be placed between 9.15 am to 3 pm.
- Bids can be modified during OFS hours.
What are the advantages of investing in OFS?
1. Discount for Retail Investors:
When retail investors buy the shares through OFS, they are offered a discount on the floor price. This discount is near to 5%.
2. Less Paperwork:
OFS process runs on the system. So, there is minimum paperwork.
3. Cost Effective:
OFS transactions don’t attract any extra charges. Only regular transaction charges and STT are levied.
Conclusion
OFS is an easy way for promoters to reduce their shareholding in the company. If you are an investor planning to buy the shares offered through OFS, then this article will be very helpful to you. It gives in-depth knowledge about OFS.
