Offer for Sale (OFS): What Does It Mean?

OFS stands for Offer for Sale.

An Offer for Sale is a simple method wherein company's promoters can sell their shares and reduce their holdings in a transparent manner through the bidding platform i.e. the exchange. Let us get into more detail on what is OFS and how does it work in the stock markets.

What is OFS?

An Offer for Sale (OFS) is a segment wherein promoter/promoter group entities/non-promoters can dilute their holdings in listed companies with a wider participation through exchange based bidding platform.

The OFS facility is available only to companies with market capitalisation of Rs 10 billion and above.

This market capitalisation is computed as the average daily market capitalisation for six months period prior to the month in which the OFS opens.

Earlier, the OFS segment only allowed promoters and promoter group entities to dilute their holdings to achieve minimum public shareholding of 25%.

Now, the segment has also enabled other shareholders who hold more than 10% in a company to benefit from OFS. In this case, the promoters can act as bidders.

The company has to inform the stock exchanges at least two days before the OFS.

The OFS mechanism was first introduced by the capital markets regulator in February 2012.

The regulator has mandated that at least 25% of shares in an OFS must be reserved for mutual fund and insurance companies, while 10% must be reserved for retail buyers.

In an OFS, a buyer has to provide a bid in order to acquire the shares. The company sets a floor price. Buyers cannot bid at a price below the floor price.

In some cases, the seller in OFS may offer a discount to retail investors.

The buyers can include market participants such as individuals, companies, qualified institutional buyers and foreign institutional investors.

OFS in Stock Market During Recent Years

The main purpose of an OFS is to provide shareholders holding more than 10% with an easy alternative to sell their stake in the company.

This is especially used by government companies to reduce their holdings.

The spate of OFS has increased in recent years with the capital markets regulator mandating 25% public shareholding in listed firms. (25% for private companies and 10% for government ones).

The government itself has come out with offer for sale in several large and small public undertakings, both for disinvestment and hiking public shareholding purposes.

OFS vs an IPO: What's the Better Option for Companies?

Note that the OFS process is more transparent than that for initial public offers (IPO).

An IPO requires an investment banker to be appointed for underwriting the IPO. This is then followed by registration with the market regulator and drafting a prospectus.

OFS, on the other hand, requires minimal paperwork which makes it a simple and less time-consuming process.

As of writing, there have been 138 OFS issues so far, as per the NSE website.

What Should Investors Do?

Even for companies that investors are well aware of, an investment decision without taking cognizance of valuations is fraught with risk.

The valuations have to be evaluated not just with respect to past performance but also in light of the changes in economic and business dynamics.

Hence, as in the case of every other stock, investors should consider only those OFS that allows them reasonable time to take informed decisions.

They would rather be safe staying away from such offers than be sorry about a wrong decision.

Happy Investing!

FAQs on Offer for Sale

1. What is OFS in stock markets?

OFS stands for Offer for Sale.

An OFS is a simple method wherein company's promoters can sell their shares and reduce their holdings in a transparent manner through the bidding platform i.e. the exchange.

The main purpose of an OFS is to provide shareholders holding more than 10% with an easy alternative to sell their stake in the company.

2. Is OFS good for stock?

The spate of OFS has increased in recent years. So the question whether OFS is good or bad was bound to be raised.

Here are the pros and cons of OFS:

Pros -

Discount for retail investors: When retail investors participate and buy shares through OFS, they generally get a discount.

Hassle free process: The entire process of OFS requires minimal paperwork from the investor.

Cons -

Limited reservation: market regulator guidelines state that the minimum offer to be reserved for retail investors has to be marked at 10%. It can go up to 20% for PSUs. This is lower than the 35% reservation for retail investors in the case of IPOs.

Shorter time frame: OFS has the issue period of a single trading day. For IPOs, the period is three days while FPOs can remain open for ten days at a stretch.

3. How does an OFS impact a stock?

The offer price for OFS is set at a lower price. Now, you would assume that the stock price will come down, but that is not always the case.

OFS is at a discounted price as the offering company wants investors to benefit by applying through the OFS.

Also, OFS does not affect the number of authorized shares.