OFS or Offer for Sale is an option that a company chooses when it requires an additional funding. This comes as a second option for a company after it goes for IPO. Before we get into more details, let’s look at the quick video from HDFC Securities on OFS:
How does OFS work?
In an OFS, promoters of a company dilute their stake by selling their shares on an exchange platform. Interested investors including retail investors, companies, Foreign Institutional Investors (FIIs) and Qualified Institutional Buyers (QIBs) can bid for these shares.
How to bid for an OFS?
In an OFS, company first sets up a “floor price”. An investor has to provide a bid to get the shares allocated for him under Offer for Sale. The floor price basically means the minimum price for bidding. One cannot bid for shares at lesser price than the floor price.
Also, there is no minimum limit to participate in Offer for Sale. An investor can bid for even a single share under this program.
Generally, OFS shares are allocated in two ways:
a) Single clearing price
b) Multiple clearing price
All investors are allocated shares at the same price in case of a single clearing price; however, in case of multiple clearing price, shares are allocated to investors at a price priority basis.
For example, two investors A and B apply for an Offer for Sale. A places a bid at Rs 50 per share wherein B places a bid at Rs 60 per share. In this example, B would be given preference over A when shares are allocated.
How to apply for an Offer for Sale?
As an individual investor, you can apply in the retail category for the OFS. In this category, your total bid value shall not exceed INR 2 lakh. If that happens, your bid becomes ineligible. More importantly, you would need a demat account and a trading account in order to participate in the bidding process. If you are an offline investor, you can participate under this program through an assigned dealer.
When is the right time to invest in Offer for Sale?
Irrespective of whether it is IPO, FPO or OFS, it is very important for an investor to know company’s background and growth perspective. Offer for Sale is a simplest process among all the 3 options to raise funds to meet financial requirements. Hence, invest if the company is doing good.
What are the pros and cons of investing in OFS?
Like any other investments, investing under ‘Offer for Sale’ program also has both advantages and drawbacks. Let’s look at both of them:
a. Retail investors are generally offered the shares at discount price on the floor price. Such discount is around 5% in these offerings. This discounted price is always one of the benefits that the retain investor gets in such fund raising.
b. The entire process of ‘Offer for Sale’ is a paperless process. That means, it is all system drive. Hence, it has less paper work and less time consuming.
c. Only the regular Securities Transactions charges are applicable for the shares applied under ‘Offer for Sale’. This makes it cost effective too as there are no separate charges at all.
a. In case of IPOs, the minimum reservation of shares allocation to retail investors is 35% which is not the case with OFS. Here, you get only 10% reservations for retail investors which goes up to 20% in case of Public Sector Undertakings.
b. The bidding window is open for not more than one day under this program compared to 3-10 days in case of FPOs. Companies are requires to inform SEBI 2 bank workings days prior to the offer and hence, it is important as an investor to be up to date to avoid any such opportunities.
Offer for Sale is one of the simplest way of raising funds from investors and if the company’s outlook is strong, then there is no reason to miss an opportunity to go for it as an investor.