Companies require capital to conduct business. There are various sources of capital. Generally, companies use a mix of internal accruals, debt, and equity to fund growth. A company has to launch an initial public offering to raise funds from the equity markets for the first time. In an IPO, the promoters can dilute their holding as well as issue fresh equity. What options do promoters have if they want to dilute a substantial stake after an initial public offering? They can either sell in small blocks or opt for an Offer for Sale (OFS).
What is OFS?
It is important to know what is OFS to get a clear idea of how to apply for an offer for sale. OFS is an efficient means for promoters and promoter entities to dilute their shares in a public company. By opting for OFS, promoters can utilise the bidding platform of the exchange for price discovery. Earlier only promoters and promoter group companies were allowed to use OFS as ‘sellers’ for offloading shares, however, later the OFS facility was extended to non-promoters of eligible companies with at least 10% shareholding. The OFS system was introduced by the Securities and Exchange Board of India in 2012 to help promoters comply with minimum shareholding norms. The largest 200 companies by market capitalisation on Indian exchanges are eligible for OFS.
How to apply for OFS?
After getting an idea of OFS, the logical question is how do I apply for OFS? With the advent of electronic trading and demat accounts, applying for OFS has become very easy. The technical part of ‘how to apply for OFS’ is not very complicated. However, it is important to know the entire process. In the case of OFS, the bidding process is used for price discovery by the company. A retail investor can either put bids at a specific price or at the cut-off price. The process is similar to that of an IPO book-building process. The cut-off price of an OFS is determined after gauging the demand from investors at different price points.
The bids can be placed either through the broker or the exchange if the investor is registered. The investor interest at different price levels can be checked from the exchange’s website. The subscription demand coupled with the indicative price gives a fair idea of the demand for an OFS.
How many bids can be placed?
An investor can place multiple bids at different price points. To get allotment through an OFS, it is mandatory to have the total bid amount in the account. The bids can be changed during the day and the final allotment is declared at the end of the day. Just like an IPO, in the case of partial allotment, the excess fund is returned to the investors on the same day. In case of oversubscription, the allotment is made on a proportionate basis for bids placed at the cut-off price.
How to apply for OFS shares through a demat account?
To apply for OFS shares log into your trading account and go to the section which has all the corporate action options. All the active offer for sale options will be displayed. Once you choose the OFS, you will have to select the retail or the non-retail category. Place your order at the price of your choice. Select the ‘market order’ option to place the order at the cut-off price.
Points to remember
- If the bid is below the floor price, no allocation will be made.
- As per SEBI regulations, a minimum of 25% of the shares on offer are reserved for mutual funds and insurance companies.
- Except for mutual funds and insurance companies, no single bidder can be allocated more than 25% of the shares on offer.
- An OFS order can be placed between 9.15 AM and 3 PM
- The settlement of an OFS is done on a trade-for-trade basis.
OFS is generally a good opportunity to invest in large companies. The entire process of OFS is simple and paperless. Retail investors are also offered a discount on the floor price if they subscribe to an OFS.