Introduction
You must have often heard about the concept of Offer for Sale (OFS) in the share market. OFS refers to a method where individual promoters or a group of promoters prefer to sell their shares. This option is adopted to reduce their holdings in a company.
There are several reasons why promoters seek to limit their stakes in a company by selling these shares to retail investors. Read on to learn more about OFS and its various applications.
What is an Offer for Sale (OFS)?
A company might need extra funds at a particular point in time for various purposes. These funds might be needed for the further growth and expansion of the company. In such a scenario, promoters or owners of a company decide to sell their shares to retail investors. This is called an 'Offer for Sale' or 'OFS'.
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An Offer for Sale is a quick way to secure extra funds that the company needs urgently. When promoters announce an OFS, retail investors, institutional buyers, and foreign institutional investors can bid on these shares.
However, according to SEBI, 25% of the shares in an OFS shall be reserved for mutual funds and insurance companies.
What is the reason behind the high cut-off price for retail OFS orders?
After launching an OFS, institutional, and High Net Worth Individual (HNI), orders are considered before the retail bids. While the HNI orders are taken up on the first day, retail bids are considered on the second day. Therefore, based on the HNI bids on the first day, a cut-off price is determined for retail bids. This is the main reason behind a higher price tag for the retail offer.
How to determine the maximum bid quantity for retail bids in OFS?
As a retail bidder in an OFS, you can determine the quantity of bids allowed only after the cut-off price is known. Bids that are less than Rs 2 lakhs come under the category of retail bids. You can calculate the quantity of bids for retail OFS bids by dividing Rs 2 lakhs with the cut-off price of the share.
Although, once the cut-off price is announced, the maximum quantity is also updated on the bulletin page. Moreover, only retail bidders can bid for a particular OFS at or above the cut-off price.
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Can retail investors apply for an OFS below the cut-off price?
As per the guidelines, the first day of an OFS is dedicated to institutional and HNI bids. After this, on the second day, a specific cut-off price will be decided based on the bids received on the first day.
Retail investors are only allowed to bid after the cut-off price is declared. As a retail bidder, you cannot bid for an OFS below the cut-off price declared by the company. You can either bid equal to the cut-off price or above it.
How to apply for OFS?
You can easily apply for an OFS through your Demat account and an online trading platform.
You will often find the OFS option under 'Corporate Actions' on your trading platform. To apply for an OFS of a company, you must specify the bidding quantity and bid price of the shares.
Conclusion
To sum up, as a retail investor, you must wait till the second day of an OFS to place the bids. If the share demand is less, you will probably get a good cut-off price for them. However, the situation can be reversed if the HNI bids are placed on the first day for huge volumes of shares.
An offer for sale can undoubtedly be a great chance for retail investors to invest in a promising asset. But bidding for shares at a high cut-off price might not be a wise decision. Therefore, you must consider opting for shares with a low cut-off price.
Related Articles: What is Offer For Sale (OFS) | How Can investor Buy Shares In OFS
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