What Is An Offer For Sale, And What Are Its Benefit and Limitations

What Is An Offer For Sale?

Offer for sale meaning/OFS is a quick and convenient way of selling shares through the trading platform for publicly traded companies. A company can use an Offer for Sale (OFS) when it needs additional capital to achieve its objectives. The promoters dilute their holdings and use OFS to sell shares to retail investors, corporations, QIBs - Qualified Institutional Buyers, and FIIs - Foreign Institutional Investors on an exchange platform.

Publicly traded private and state-owned companies have widely adopted this method, and the government later sold its stakes in public sector companies.

Features:

• The OFS mechanism is only used when existing shares are added to the block, and only shareholders owning more than 10% of the share capital of a company can propose such an issue.
• OFS is accessible to 200 leading companies by market capitalization, and 25% of the shares offered are kept for Insurance Corporations and Mutual Funds. Other than these two, no other bidder can be awarded more than 25% of the bid amount.
• At least 10% of the offering size is for retail investors. A seller may offer retail investors a discount on the offer price or the final price. The OFS counter is only open for one day, and the company must notify the stock exchanges at least two days before the OFS. 
• Compared to FPO - Follow-On Public Offering (FPO), OFS is better, as FPSs are open for 3 to 10 days and is time-consuming as it requires submitting projects and procuring approvals from SEBI. At OFS, all retail offer amounts are 100% hedged by cash and cash equivalent margins. The process is fast, and excess funds are returned to the trading participant the same day after 6:00 p.m. due to non-allotment or partial allocation.
• 100% margin offers are subject to change during OFS business hours. However, those with a zero percent margin can only be changed upwards for price and quantity revision or modification. No cancellation is allowed on these offers.
• Offers below the minimum price will be rejected, and the assignment remains subject to the final price discovery. On the contrary, an FPO creates a price range within which bids are placed. The minimum price typically prevails at a discount, but this can sometimes get risky. 

What is an OFS? Step-By-Step Guide to Selling Your Products 

What is OFS in IPO - OFS is quite different from IPOs in terms of simplicity and profitability. Starting an IPO is time and money-consuming as it is essential to file a SEBI application, get a prospectus ready and hire underwriters.

On the other hand, OFS is a more straightforward and convenient procedure. Let us look at the step-by-step procedure of how an OFS works:

Step 1 - The company leaders or promoters decide to sell their shares through OFS

Step 2 – They should communicate this information to the stock exchanges at least two days(working days) before the opening date

Step 3 - The promoters announce the OFS date, which is only valid on one trading day.

Step 4 – The minimum price is declared at which the company sells its shares, and you cannot purchase the OFS at a price less than the floor price.

Step 5 - Investors who bid above the limit price will receive shares, and the money will be handed over to the organizers. 

Offer For Sale Example

For example, SAIL - Steel Authority of India Limited launched an OFS in January 2021 at a minimum price of Rs 64 per share. Investors started bidding from Rs 64 or more, and after receiving all offers, the company announced the price reduction. The limit price for SAIL OFS was 65.65 rupees in the example above. Investors who tendered less than Rs 65.65 will not be allocated, and their funds will be returned to trading accounts.

People/entities Who Are Allowed to Invest in an OFS?

Retail investors and Institutional investors can invest in an OFS. Retail investors are investors with a total offer value of less than Rs 2 Lakhs.

Offer For Sale Example:

Company XYZ has a minimum share price of Rs. 100.

Mr. Roy is a retail investor and will be eligible for 2000 shares, whereas Roy and the company, an institutional investor, will be entitled to 2001 shares. 

Total Supply For Mr. Roy will be = Limit Price * Number of Shares = Rs 100 * 2000 = Rs. 200,000.

Total Supply For Roy and Company = Limit Price * Number of Shares = Rs 100 * 2001 

= Rs 2,00,000.010.

Mr. Roy’s offer will be equal to or less than Rs 2 lakhs which can be admitted in the retail category. 

Roy and the company’s offer is only Rs 10 higher than Mr. Roy, and it will be eligible for this as it is an Institutional Investor.

An OFS is accessible to

● Institutional investors.

● Mutual funds

● Insurance companies

● Investors in Foreign institutions

● Pension or Retirement funds

What Are Some of the Benefits of an OFS?

OFS has many benefits, as retail investors can get a discount on the minimum price when applying for OFS shares.

• Retail buyers who choose to invest through OFS can benefit from a rebate of up to 5%.
• OFS is only operational for one day (called the offer for sale today), which means it is a more convenient and time-saving option for retail investors.
• The best feature about OFS is that there are no additional fees besides the STT or securities transaction fees that apply to any stock investment.

Things You Need to Consider Before Investing in OFS?

You can only put money in an offer to sell through a representative, broker, or intermediary, and OFS cannot be requested via physical forms. Therefore, a Demat account is mandatory to invest in an OFS. People investing in OFS must have access to the required funds in their accounts to qualify for the offers. 

For example, the order value of Mr. Roy is Rs 2 lakhs, so he should have Rs 2 Lakhs in his trading account before placing an order.

• Orders for OFS can only be placed between 9:15 am and 3:00 pm. Orders cannot be changed or placed after 15:00 hours.
• When applying for an OFS, only limited orders can be placed. Market orders will be disqualified. The companies are not permitted to sell more than 25% OFS to one offeror, except mutual funds.
• The successful bidders' shares will be credited to their dematerialization account within T + 2 days.

Key Takeaways

To conclude, OFS is a convenient, money-saving, and time-saving option using which retail investors can buy shares in publicly traded companies and promoters can mitigate their stakes in publicly traded firms.

It has pros and cons, but unlike other means of trading, OFS is quite a beneficial instrument that offers discounts and makes a share accessible on a wider platform.