OFS is a simplified and transparent process through which promoters of listed companies can sell their shares at the exchange. India’s securities market regulator, SEBI first introduced this concept in 2012. OFS full form is ‘Offer For Sale’, and it helps promotors of publicly-traded enterprises to reduce their holdings.
Initially, only promoters of state-run and private listed companies adhered to the OFS guidelines. However, in recent times, the government of India also utilises the OFS pathway to divest their shareholdings in public sector undertakings (PSUs). This sale mechanism is now available to 200 top-performing firms in India. In the earlier days, only the promoters of listed companies could participate in the OFS proceeding to offload their holdings. However, SEBI now allows even non-promoters of eligible enterprises holding at least 10 per cent of stocks to participate in the OFS.
Though the function of OFSs and follow-on public offerings (FPOs) are quite similar, there is a subtle difference in their working. The former only utilises the existing stocks of promoters, while the latter can either issue fresh shares, or keep the existing stakes of promoters on the block. Here you can find all the difference between OFS and FPO.
How to participate in OFS?
There are a few rules and regulations concerned with the release of OFS at the exchange.
- The allocation of stocks does not take place if the bidding rate is below the floor price.
- The OFS window remains operational only for a single day at a time. However, the OFS releasing companies should compulsorily inform the stock exchange about their intention two banking days prior to the stake release.
- Interested investors can place orders for OFS between 9:15 am to 3:00 pm on the releasing day.
- At least 25 per cent of the stakes released through OFS remain reserved for mutual funds (MFs) and insurance companies.
- Another 10 per cent of the stocks remain reserved for retail investors. The sellers can even offer discounts to these investors during the OFS processing either on the bidding rate or the final allotment price.
- In OFS, the settlement goes ahead on trade for trade basis. The entire bidding capital remains backed by 100 per cent margins either through cash or its equivalent. OFS transaction is a quick and convenient process. The excess fund (if the shares do not get allotted or get partially allotted) gets refunded to the trading member on the release date after 6:00 pm.
What are the advantages of investing in OFS?
OFS can be a beneficial investment tool for many investors. Have a look at the advantages of OFS.
Purchasing OFS is a cost-effective option for investors as they do not incur any additional expenditure other than paying tax duties and standard transaction charges.
OFS is a convenient and transparent financial tool to invest in stocks. In this medium, there is zero possibility of frauds and manipulation as the funds get settled on a real-time basis.
Investors do not require exhaustive paperwork like uploading of application forms and authentication of documents. Interested candidates just need to proceed through an online application system to participate in the OFS.
Wealth of Information
Since listed companies release the OFS, there is ample information regarding their management, financial stabilities, present debts, and expansion plans. Investors can go through the profile of the firm in detail before deciding on trading on the OFS.
Companies allow traders to put multiple bids above the floor price while applying for the OFS. This unique facility is not available while investing in IPOs or FPOs. Investors are even permitted to modify their bid during the working hours of the exchange on the date of issue of OFS.
The processing of the OFS gets completed within a single trading session. So, it is a fast and hassle-free mode of buying stocks.
Investors are even eligible for purchasing stocks in OFS at a discounted price. In most cases, there is a discount of about 5 per cent on the floor price, which is far less than the valuation of share in the secondary markets.
What are the disadvantages of investing in OFS?
Despite having several advantages, there are a few disadvantages of investing in the OFS.
Limited Bidding Window
The bidding period for the OFS remains open only for a single trading session. Whereas, in the case of IPOs and FPOs, the issue period ranges between three to ten days. So, investors get a minimal time-frame to make their decision while investing the OFS. Financial experts advocate traders to remain updated about the market so that they never lose out on a great investment opportunity.
Minimal Reservation for Retail Investors
In OFS, there is barely 10 per cent reservation of the stocks for retail investors. It may increase up to a maximum of 20 per cent if the PSU companies issue the OFS. However, it is far less than IPOs, where 35 per cent of the shares remain reserved for retail investors.
Frequently Asked Questions
1. What is the floor price in OFS?
The floor price in the OFS is the amount above which investors can place their bid while applying for the financial scheme. The companies release the floor price for the OFS on
T-2/T-1 day (here, T= day of the OFS).
2. What is Indicative Price in OFS?
The indicative price in the OFS refers to the volume-weighted average rate for every confirmed bid. However, the indicative price is different for retail bids and non-retail bids.
3. What is Cut off / Clearing Price in OFS?
The cut off price or the clearing price is the lowest price at which companies allocate the shares during an OFS. Similar to the indicative price, the cut off price also gets separately displayed for the retail and non-retail category.
4. Who can participate in OFS?
All investors registered with a trading member at the NSE (National Stock Exchange) or BSE (Bombay Stock Exchange) can participate in the bidding process of OFS.
5. How Can Retail Investors place orders in OFS?
Interested traders can place orders for OFS if they maintain a trading account with an existing member of the stock exchange. Investors need to specify the number of shares they wish to purchase and the maximum price they are willing to pay for the same. The stock exchanges announce the allotment status at the end of the trading session (6:00 pm) on the OFS issuing date to the trading members. Investors can receive information from the members.
6. How is OFS different from the normal market?
Purchasing shares through the OFS scheme is different from the standard market operations as here investors get the opportunity to bid for stocks at a rate above the floor price. At the end of the trading session, successful allotments get conveyed to investors through trading members. Whereas, in the standard exchange transactions, the price for stocks remains fixed. Moreover, in the OFS, candidates can only purchase shares, but cannot sell them.
7. Under the Retail category, what is the maximum amount can an investor invest?
Under the retail category, an investor can order for shares up to a valuation of Rs 2 lakh in one company’s OFS.
8. Does a client get a discount if he buys shares through OFS?
Yes, clients get a discount on the floor price if they order share through OFS. The company publishes the details of the discount on the day of announcement of the scheme. Usually, the discount becomes effective either on the final allotment amount or the bidding value.
9. What is the difference between OFS and IPO?
To understand it read our tutorial on OFS vs IPO.
10. What is the difference between OFS and FPO?
To understand it read our tutorial on OFS vs FPO.