Offer for Sale

2nd June, 2023 Economy

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Context

Government has proposed to offload 3 percent stake in Coal India Limited via an offer-for-sale (OFS) at discount of 6.7 percent to last closing price of the stock.

Offer for sale (OFS)

An offer for sale in the stock market is a way for a company’s owners to sell their shares to the general public. Unlike an IPO, no new shares are created in an offer for sale. Rather existing shares are transferred from owners to general public.
An Offer for Sale is a simpler method wherein promoters in public companies can sell their shares and reduce their holdings in a transparent manner through the bidding platform for the Exchange.
The mechanism was first introduced by India’s securities market regulator SEBI, in 2012, to make it easier for promoters of publicly-traded companies to cut their holdings and comply with the minimum public shareholding norms by June 2013.
The method was largely adopted by listed companies, both state-run and private, to adhere to the SEBI order. Later, the government started using this route to divest its shareholding in public sector enterprises.

Note: The OFS segment was earlier allowed only for the Promoters/Promoters’ Group Entities of listed Companies, to act as ‘Sellers’ to dilute/offload their holding to achieve minimum public shareholding of 25%. Now, however, the segment has been extended to non-promoters of eligible companies holding at least 10% of share capital of the company.

Reasons for an Offer for Sale

Promoters are owners of the company. They invest their capital, time and efforts to establish the company.
So, why would they sell their stake? Does an offer for sale mean that the promoters are no longer interested in the company? Not Necessarily. Promoters can sell their shares via an offer for sale for any of the following reasons:

1. Government Regulations: As per SEBI, promoters cannot hold more than 75% stake in a listed company. So, a promoter holding 80% stake in the company has no other option than to offer 5% shares via an offer for sale to comply with government regulations.
2. Personal Reasons: Building a company is like investing in an asset. Assets are created to support you during emergencies. Similarly, even promoters might need funds for personal reasons which is why they can initiate an offer for sale.
3. Diversification: Like us, even promoters might be looking to book their profits in the company. So, they sell their stake and invest in other businesses or assets to diversify their overall portfolio.
4. Abandoning a Sinking Ship: This is the only reason for an offer for sale which raises a red flag. Promoters have inside knowledge about the business. They would be the first to know if the company is in trouble. So, an offer for sale can be an opportunity for promoters to abandon a sinking ship!

How Does an Offer for Sale (OFS) work?

Promoters of the company decide on selling their stocks through an offer for sale.
This information is communicated to the exchanges minimum two days prior to the offer for sale. This is compulsory.
The company announces the offer for sale date. Unlike IPOs, offer for sale is only open for 1 trading day.
The company announces the floor price. This is the minimum share price at which the promoters are willing to sell their shares. You cannot bid for an offer for sale below the floor price.
For example: Steel Authority of India Limited (SAIL)initiated an offer for sale on 14th Jan 2021. The floor price was decided as Rs 64 per share. In this case, a bid of Rs 63 would be automatically rejected. One can bid Rs 64 or higher.
Once all the bids are in, the company announces the cut off price. In the above example, the cut off price for SAIL’s offer for sale was Rs 65.65. Investors who bid below Rs 65.65 will not get allotment and their money will be refunded to their trading account.
The investors who bid above the cut off price will receive the shares and the money will be transferred to the promoters.

Who Can Invest in an OFS? – Investors in Offer for Sale

There are two types of investors in an offer for sale.

1. Retail Investors
2. Institutional Investors

Retail investors are ones whose total bid value does not exceed Rs 2 Lakhs. For example: The floor price of ABC Ltd is Rs 10. Ram applies for 20,000 shares. Shyam applies for 20,001 shares.

- The total value of Ram’s bid = Cut off price * No of shares = Rs 10 * 20,000 = Rs 2,00,000
- The total value of Shyam’s bid = Cut off price * No of shares = Rs 10 *20,001 = Rs 2,00,010
The total value of Ram’s bid is less than Rs 2 Lakhs. Hence, he will qualify under retail category. And while Shyam’s bid is just Rs 10 more than Rs 2 Lakhs, he will qualify as a non-retail investor.
Other non-retail institutional investors in an offer for sale include:
- Mutual fund companies
- Insurance companies
- Foreign Institutional Investors
- Pension funds etc.
As per SEBI, in an offer for sale, 25% of the issue size must be reserved for institutional investors like mutual funds, insurance companies etc. And 10% must be reserved for retail investors (like Ram).
By qualifying as non-retail investor, Shyam has reduced his allotment chances as he faces tough competition from institutional investors. Also, he will not be applicable for the 10% retail reservation. Hence, while applying for an offer for sale, ensure that the total value of your bid is less than Rs 2 Lakhs to avail the 10% retail investor quota.

Allotment of Shares in an Offer for Sale

Shares in an offer for sale can be allotted in three ways:

Single Clearing Price– All investors will be allotted shares at the same price irrespective of the quantity of shares bid. This evens the playing field for retail investors. For example: Ram bids for 1,000 shares of SAILat Rs 65 per share. While Life Insurance Corporation of India (LIC) bids for 2,00,000 shares at Rs 66 per share. In single clearing price offer for sale, both Ram and LIC will get SAIL shares at the same price.
Multiple Clearing Price– Here, different investors get shares at different prices based on quoted bid price. For example, LIC will be given preference since their bid price and quantity both are higher than Ram.
Cut-off Price Option– In this option, investors are allotted shares at the lowest price i.e. the cut off price. Investors need not worry about the price discovery as they will get the shares at cut off price only irrespective of its discovered price.

FAQs

What is the full form of OFS?

The full form of OFS is Offer for Sale. It is a way for the promoters of a company to sell their shares to the general public.

What is offer for sale in the stock market?

An offer for sale in the stock market is a way for a company’s owners to sell their shares to the general public. Unlike an IPO, no new shares are created in an offer for sale. Rather existing shares are transferred from owners to general public.

Can only promoters sell their stake in an offer for sale?

Earlier only promoters were allowed to sell their stake in an offer for sale. But now any shareholder holding 10% stake in the company can participate in an offer for sale.

What is the settlement period for an offer for sale?

The settlement of shares in an offer for sale takes place in T+1 day for retail and institutional investors with 100% margin. For institutional investors with no margin, the settlement takes place in T+2 days.

How long is an offer for sale open for subscription?

An offer for sale is open for only 1 trading day between 9.15 pm to 3 pm. Check out the latest offer for sale here.

Who is classified as a retail investor in an offer for sale?

An investor’s whose total bid value is equal or less than Rs 2 Lakhs is classified as a retail investor. Retail investors in an offer for sale enjoy 10% reservation.

Can one invest in an offer for sale without a Demat account?

No, a Demat account is compulsory while subscribing to an offer for sale.

What is the difference between offer for sale and private placement?

In a private placement, a company sells its shares to a select group of investors or institutions. Whereas in an offer for sale, the shares are sold to general public, at random.

Rules and regulations in an OFS

This facility is available only to the top 200 companies in the share market. The ranking is based on market capitalisation.
Non-promoter shareholders with more than 10% of share capital are also eligible to offer shares through an OFS.
The company has to inform the stock exchanges at least two days before the OFS.
SEBI has mandated that at least 25% of shares in an OFS must be reserved for mutual fund and insurance companies.
In addition, a 10% reservation is made for retail buyers.

Difference between OFS & IPO – i.e Offer for Sale & Initial Public Offering

Parameters	Offer for Sale (OFS)	Initial Public Offering (IPO)
Identity of the Seller	In an offer for sale, promoters sell their shares to the general public.	In an IPO, the company sells its shares to the general public for the first time.
Total No of Shares	In an offer for sale, no new shares are issued. Existing shares are only transferred from promoters to investors.	In an IPO, new shares are issued in the market. This increases the free float of the company.
Recipient of Sale Proceeds	In an offer for sale, the sale proceeds are received by the promoters.	In an IPO, the company receives the sale proceeds.
Market Regulator’s Approval	Prior approval of market regulators is not required in an offer for sale. But the company must inform the exchange two days prior to an offer for sale.	Without SEBI’s approval, companies cannot launch an IPO.
Trading Hours	An offer for sale is open for only 1 trading day	An IPO is open for 3-4 trading days.
Price Discovery	Price discovery is highly Transparent in an offer for sale	Price discovery is opaque as lead runners decide the price band.
Application Process	One can subscribe to an offer for sale only through a broker. Physical applications are not allowed.	One can subscribe to an IPO either through your broker or through physical form.
Reservation for Retail Investors	In an offer for sale, only 10% of the issue size is reserved for retail investors.	In IPO, up to 35% of the issue size is reserved for retail investors.