Offer For Sale

Published on :

21 Aug, 2024

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Offer for sale (or OFS) is a process whereby stakeholders (like stakeholders and promoters) can sell their stake to the public and thus reduce their holdings. The primary objective of this process is to raise additional capital after an IPO in a transparent manner.

Offer for sale of shares includes securities often sold at a discounted price. OFS is an easier, simpler, and quicker way to issue public shares. In addition, they are cost-effective for the firms. However, the allocation period of these offerings is limited to a day.

Offer For Sale (OFS) Meaning

Offer for sale (OFS) is a segment in the stock market that allows promoter groups to raise additional capital for the firm by selling their stake to the public.
The concept originated in 2012 through the guidelines issued by the SEBI (Securities Exchange Board of India).
Only 200 companies listed on the Indian Stock Exchange that fulfill the market capitalization criteria can proceed with OFS offers.
Bidders (or investors) can apply for an IPO by opening their Demat account, placing a bid price for a particular stock, and availing those shares at a discounted price.

How Does Offer For Sale Work?

The offer for sale process is the additional segment where promoters or stakeholders of the company can sell their holdings (shares) on the bidding platform. By doing so, they can acquire extra funds for the business transparently. However, this facility is only available to companies with a market capitalization of ₹10 billion ($1.2 billion) or more.

OFS was first introduced in India in the year 2012. At that time, SEBI (Securities Exchange Board of India) came up with its first offer for the sale process for ONGC (Oil and National Gas Company). They aimed to sell 1.5% of their stake to the public through bidding on BSE (Bombay Stock Exchange) or NSE (National Stock Exchange).

Offer for sale of shares is a systematic approach where promoters and non-promoter groups try to sell their stake on a platform exchange. However, non-promoter groups must own 10% capital in the company. In addition, retail and institutional investors can both participate in this program. However, according to the SEBI, 25% of shares must be reserved for institutional investors and at least 10% for the former.

To start the offer for the sale process, companies must follow certain steps and regulations. Let us look at them:

Once promoters decide on OFS, they must inform the stock exchange two days in advance.
Likewise, the company must announce the floor price (minimum price level) and offer date. A floor price is usually at a discount with the market price.
The OFS trade happens only for a day.
Bids that are below the floor price will be rejected. However, the seller will refund the amount to their bank accounts for rejected bids.
As soon as the bidding ends, the company announces the cut-off price. Thus, investors applying for it will get their shares within a transaction time of T+2 days.

How To Apply?

Let us look at the steps on how investors can apply for an offer for sale to the public on an exchange:

If any listed company comes up with an OFS, investors can find them on any bidding platform.
Open the broking platform and select the OFS column.
Click the Stock symbol and select "Place Order" from the Options.
Place a "bid price" not less than the floor price. Otherwise, it will get rejected. Likewise, select the number of shares to be bought. However, there is no minimum requirement for shares. Investors can buy one share also.
Submit the order on the platform. A fee of ₹20 (24 cents) is charged to the investors bidding for it.
Investors can pay for OFS orders from the credit balance they received by selling the shares. However, only 80% of the amount could be utilized.
The cut-off time on NSE is 3:30 pm, and on BSE, it is 2:30 pm on the offer end date. After that, OFS orders will turn invalid. Therefore, it is necessary to keep sufficient funds to ensure likely allocation.
If the investors default on the pay-in amount, they have to lose a 10% of their bid value to the investor's protection fund.
After bidders gain the stocks, the clearing house (NSE/BSE) will transfer the shares to their demat account. Trades will get executed on T + 1 day. However, sellers (listed companies) must transfer all the shares to the exchange before OFS begins.

Examples

Let us look at some examples of recent offer for sale orders :

Example #1

The recent offer for sale announced in December 2022 is the IRCTC (Indian Railway Catering and Tourism Corp). The offer date happened on December 15 and 16 on BSE and NSE. They allocated a base issue of ₹2 crores ($241,848.40). However, the total size was ₹4 crores. In addition, the floor price decided upon was ₹680 ($8.20) per share, with a discount of 7.4%.

Example #2

The first ever OFS happened in 2012 via an Indian stock market. The MMTC Ltd (Metals and Minerals Trading Corporation of India) issued its OFS order in 2013 with a floor price of ₹ 60 or 72% discount.

Pros and Cons

Offer for sale is crucial for the promoter and non-promoter groups to sell their stake and increase capital in their firm. However, there are both advantages and disadvantages associated with it, and they are as follows:

Advantages	Disadvantages
OFS are offered at discounted rates (5% or more) to the investors.	Retail investors have fewer reservations (10%) than IPOs (Initial Public Offerings).
The entire process is simpler and easy to perform.	Less bidding time is available on the platform. It is restricted to one day.
There are no extra charges levied on the bidders. STT is the only charge or fee charged on.
The process is transparent, and there is no chance of manipulation. Also, all the information is available on BSE and NSE.
Investors can put multiple bids on a single stock. Also, there is no minimum limit on the quantity size.

Offer For Sale vs IPO

Although OFS and Initial Public Offering (IPO) are synonymous terms for raising capital, they have a huge difference between them. So, let us look at them:

Basis	Offer For Sale	IPO
Meaning	It is an offering system in the stock market where promoters and non-promoters of the company can sell their stake to the public.	IPO, or Initial Public Offering, is a system where a company, for the first time, lists on a stock exchange and issues many shares to the public.
Purpose	To raise additional capital by selling 10% of the stake.	To raise capital for the company by listing on the stock exchange.
New Shares	There are no new shares issued. Instead, the stakeholders sell their already-held shares.	In IPOs, the company issues a fresh batch of shares to the public.
Seller	Promoters groups	Company
Bidders	Retail and Institutional investors (mutual fund houses and insurance companies).	Company
Trading hours	One day	3-4 days
Eligibility (for companies)	Two hundred companies that are already listed on the Stock Exchange concerning SEBI.	Any Company that binds with the rules and regulations of their concerned country's stock exchange.
Origin	2012 by SEBI (Securities Exchange Board of India).	The first ever IPO was in 1604 by a Dutch East India Company.

Frequently Asked Questions (FAQs)

Are there any margin requirements in the offer for sale?

According to the SEBI guidelines, there are very few such requirements for OFS orders. However, investors must back up 100% of their margin or bid value to be safer. Otherwise, the seller will accept it as a result of insufficient collateral.

Can retail investors gain a discount on the offer for sale shares?

There are chances for it to happen, but it depends on the seller. They can provide additional discounts to the retail investors on the bid price or the final price on the allotment. However, the seller must mention the fact in the announcement of OFS.

Can we sell OFS shares?

Yes, investors who get the allotted shares can re-sell them in the secondary market.

Is OFS taxable?

According to the SEBI and guidelines of the Indian government, OFS shares are taxable. Therefore, bidders buying them must pay STT (Securities Transaction Tax) along with transaction charges.