In recent news, you must have heard about government companies like NTPC, Oil India, NMDC etc raising money via Offer for Sale (OFS). In this post, I have tried to explain the details regarding OFS, its process mechanism, how it is different from traditional IPO / FPO route and whether it is beneficial to retail investors.
What is OFS?
OFS stands for Offer for Sale & it is similar to FPO (Follow-on Public offer). It provides an exchange based bidding platform to promoters to sell/dilute their holdings in listed companies in a transparent manner.
The Securities and Exchange Board of India (SEBI) by a circular CIR/MRD/DP/18/2012 dated 18 July 2012, has permitted the Stock Exchanges to provide a separate window, i.e. apart from the existing trading system for the normal market segment, to facilitate promoters of listed companies to dilute/offload their holding in listed companies in a transparent manner with wider participation.
Who are eligible to participate?
Under OFS, promoters of the company who wish to dilute/offload/sell their holdings are the sellers & the broad market participants namely individuals, Corporates, QIBs, HUF, FIIs, Individuals are the buyers.
Who are allowed to sell?
Promoters of such companies that are eligible for trading and are required to increase public shareholding to meet the minimum public shareholding requirements. Under the minimum public shareholding norms, privately promoted companies are expect to have a public shareholding at 25 per cent by June 2013, while the same for the state-run listed. companies has been relaxed to 10 per cent, which has to be met by August 2013
Promoters of Top 100 companies based on average market capitalization of the last completed quarter.
How will you come to know about the OFS?
An announcement of intention to sell the shares should be done at least one trading day prior to opening the offer. You can check the latest OFS issues
https://www.nseindia.com/live_market/content/live_watch/offer_sale/ofs_sale.htm
The issue period of OFS shall not exceed one trading day. Unlike IPO/FPO, where issues are open for few days.
Where and how I can place order?
Unlike IPO / FPO, no physical forms are issued for OFS. You need to place order either through you online trading account or with the help of your broker.
First of all, very basic, you need to compulsorily have a demat/trading account(s) and permanent account number (PAN) to participate in an Offer for Sale.
Once the OFS starts, you can participate in the process yourself using your online trading accounts like ICICI Direct, Kotak Securities etc. by placing your bids under the ‘OFS’ section of their respective broking websites.
Investors, who do not have online trading accounts, can place their bids by directing the dealer of their broking company to do it on their behalf.
OFS window is available on a web based platform named iBBS (Internet Based Book Building Platform) which is accessible by all Trading Members registered with the Exchange.
What are the rules for placing Orders?
Multiple orders from a single buyer are allowed. Only limit order is allowed.
How demand and prevailing price can be seen/ known?
Cumulative demand (number of shares) is shown on the Exchange website at regular Intervals. Indicative Price is also shown on the Exchange website only in last 60 minutes of the offer for sale.
At what price will you get the shares?
Promoters are required to set a floor price & inform to the stock exchange. Based on your judgement & market conditions, current market price, price indication based on point above, you need to bid at your own price (above floor price). The bids below the floor price will be ineligible
How is allocation done?
There are two allocation methodologies:
1. Price Priority
2. Proportionate Basis
The same is informed by Exchange by issuing Notice for every OFS offering
Price Priority – In this case, the allocation is done on multiple prices. The highest bidder gets the maximum preference. Every bidder gets allocation on price priority basis till the book gets exhausted.
For e.g. NTPC OFS proposes to allocate at price priority methodology. If the highest bid received by designated stock exchange is at 180 and next is at 170, 150 and so on. Then the investors who has placed highest bid at 180 will first get allotment at 180, then the next investor who has bid at 170 would be allotted at 170 and so on as per price priority methodology, depending on the availability of shares.
Proportionate Basis – In this case, the Allocation is done on a single price. Every bidder who has bid at or above the clearing price gets allocation on proportionate basis. The clearing price is the price at which the book gets exhausted.
Allocation of shares is intimated to the brokers on same trading day, normally 2-3 hours after issue closed. Investors shall receive shares directly into their DEMAT account on allotment on T+2
In case of non-allotment, funds shall be released on T+1 day.
Can I also trade under normal Equity segment in stocks which are eligible for Offer for Sale?
Yes, you can continue trading under normal Equity segment for stocks available under Offer for sale on the day of such offer.
What are the charges applicable under OFS?
There are no additional charges to place your bids under OFS. Transaction charges, STT & other charges which are currently levied under equity segment would be applicable for OFS segment.
How is it different from IPO / FPO?
Recent OFS Issues
OFS mechanism has emerged as a preferred option for promoters to sell their stake in their respective companies. Over past one year, about 22 companies has used OFS option to raise about Rs 39,000 crore – ONGC, NTPC, Oil India, Wipro, Adani Power, Jaiprakash Power Ventures, DB Corp, Muthoot Cap, Sical Logistics, Reliance Power, NMDC, Hindustan Copper, Pioneer Distilleries and Eros International.
Whether OFS any beneficial to Retail Investors?
If you are buying a small quantity of share, you can always buy the shares in secondary market at prevailing price.
It is mainly beneficial to large investors & institutions that want to buy large quantity & can’t do so in secondary market without significant price movement. For e.g. in recent NTPC issue, LIC has bid for shares worth Rs 3000 crore. In case, they want to buy in secondary market, such large quantity may not be available and without pushing the price upwards (as demand will increase the supply).
Unlike FPO / IPO, there is no separate discount offered to Retail investors. So, for retail investors, it is only beneficial if the allotment price is significantly lower than market price. (this is highly unlikely)
If you have any queries regarding OFS or any other investment/tax related query, feel free to ask using the comments box below.