Anwar hossain February 13, 2020
If you know about IPO or Initial
Public Offering, then you already know why a company goes public with an IPO
event. IPO happens only when the company needs huge amount of capital for
investment in new sectors or expansion of the business. But, sometimes even IPO
can’t help when the expected fundraising is way too big. In those situations,
companies issue OFS or Offer For Sale to make up the deficit left by an IPO
event.
What is OFS?
OFS is process through which a
company’s promoters directly sell their shares to the investors. This is a
unique process and was introduced in the market for the first time in 2012. In
this process, promoters of a company sell their shares to public through a
transparent manner. Promoters reduce the amount of their holdings in a company
through this process.
If IPO doesn’t bring enough money,
OFS is not the only option. There is another option named FPO or Follow-up on
Public Offering, where the listed companies bring some addition shares in the
market. However, OFS is the easiest and most efficient option to meet up the
deficit from IPO.
An OFS event is open to all unlike
IPO. Promoters decrease their stake in the company by selling their share to
anybody willing to buy. The following categories of investors can participate
in an OFS in Indian stock markets.
- Retail investors
- Qualified Institutional
Buyers (QIBs) - Non Resident Indians (NRIs)
- Insurance companies
- Mutual funds
- Foreign Portfolio Investors
(FPIs) - Trusts, Hindu Undivided
Families (HUFs)
Bidding Process
OFS events allocate shares through
formal bidding. The companies issue shares and set a floor price for each
shares. Buyers and investors bid according to their wish. It is not that you
can’t bid at price below the fixed one. However, if there are too many bidders,
you bid might be of no use with that price.
But, if there is shortage of
bidders, you might come up winner even bidding a lower price than floor price.
On the other hand, you can bid on as much share as you can, there is no limit.
After all the bids are in place, the company reviews them and allocate to the
highest bidders.
You need a demat account and a
trading account in order apply for an OFS event. If you are an individual
investor, your category is retailer. After you have applied in the appropriate
category, go for the bid. One can’t bid more than Rs 2 lakh in an OFS in India.
Different countries hold different rules. If you don’t have demat account and
trading account, you can still put a bid through an assigned dealer.
Rules
- Only the top 200 companies
in a stock market can hold an OFS event. If a company just drops out of 200
after the announcement of OFS, it can continue. This ranking is made according
to total market capital of a company. - At least 25 percent shares
have to be reserved for other financial instruments like mutual funds and
insurance. - In an OFS event, even the
non-promoters can offer a sale for their shares if it values over 10 percent of
all the shares. - A company has to send
details of their OFS event to the stock exchange two days prior to the due
date. - This mandatory to reserve
10 percent shares for the retail category buyers.
Pros and cons
Among many other advantages of
OFS, discount is the most lucrative one. Retail investors find this very useful
as it brings a good chunk of extra money. Companies often offer a discount on
the floor price of shares for the retail investors. This discount is not more
than 5 percent. But, 5 percent is great discount considering the whole discount
is additional income.
Besides, OFS is also very cost
effective for those who are new to the market. Generally, buying a share
requires a lot of additional charges like brokerage firm charge, advisor firm
charge, application charge, regular and security transaction charge and many
more. On the other hand, OFS is almost free of additional charges as you bid it
yourself. On regular and security transaction charges are needed which are
considerable. OFS is also a very easy process which consume little time.
There are some disadvantages too. IPOs generally keep 20% reserved for the retailers whereas OFS has 10% only. If a company reserves more for retailers, that’s good; if not, you have nothing to do. Bidding time is also very short in OFS. An FPO offer usually lasts for a several days to up to 10 days. An OFS bidding time lasts for a single day only.
