What is OFS in IPO and How to Apply?
The Offer for Sale (OFS) method, introduced by SEBI in 2012, enables listed firms to sell their shares directly through the exchange platform. This simplified approach facilitates the dilution of stakes for promoters of listed companies. The OFS method allows various entities, including foreign institutional investors, retail investors, and companies, to participate in the bidding process for these shares.
Offer for Sale Meaning
An Offer for Sale occurs when existing shareholders, such as promoters, venture capitalists, or employees, decide to sell their shares in the company during an IPO. These shares are offered to the public, and the proceeds from the sale go to the selling shareholders rather than the company itself. It provides an exit opportunity for early investors and employees who wish to monetize their investments.
Significance of Offer for Sale in IPO
The Offer for Sale mechanism benefits both the company and the shareholders. The company does not raise any fresh capital as existing shareholders are selling the shares. However, it helps achieve the goal of listing on the stock exchange, expanding the investor base, and enhancing the liquidity of shares. From the shareholders' perspective, an Offer for Sale allows them to unlock the value of their investments and potentially realize gains.
How to Apply for OFS?
Applying for an Offer for Sale (OFS) has become much easier for investors with the introduction of electronic demat and trading accounts. While the technical aspect is not complicated, it remains crucial for investors to gain comprehensive knowledge about the OFS application process.
In the case of OFS, the company utilizes the bidding process to determine the price. Retail investors can place bids at a specific price or opt for the cut-off price.
The process of applying for OFS closely resembles the book-building process of an IPO. Determining the cut-off price relies on analyzing the demand from various investors at different price points.
Investors can book their bids either through a broker or directly through the exchange if they are registered. The exchange's website provides information on investor interest at different price levels. By assessing the subscription demand and indicative price, investors can clearly understand the demand for a particular OFS.
Distribution of OFS Shares
In an Offer for Sale (OFS), the shares are typically distributed through two methods:
- Single Clearing Price
In this method, a single clearance price is determined, and all investors receive their shares at the same price.
- Multiple Clearing Prices
If there are several clearing prices, the shares are allocated to investors based on the pricing precedence. For example, let's consider two competitors, A and B, who submit an OFS application. B offers Rs. 60 per share, while A offers Rs. 50 per share. In this scenario, B would be given preferential treatment over A during the distribution of shares.
Fortunately, another option available to traders is the cut-off price alternative. The cut-off price is the lowest price for a shareholder to be allotted shares in an OFS. With this method, investors do not have to worry about price formation during the bidding process and can request shares only at the cut-off price.
Number of Bids You Can Submit
You actively place bids during an OFS, with the option to choose various price points. To secure an allotment, it is mandatory to have the total bid amount available in your Demat account. However, it is important to note that bids may change throughout the day. The final allotment, based on the bids, is declared at the end of the day.
The Final Word
Participating in an Offer for Sale during an IPO can be a lucrative investment opportunity. By understanding the concept of Offer for Sale and following the application process diligently, you can increase your chances of acquiring shares in a company that meets your investment objectives. Remember to stay informed, evaluate risks, and seek professional advice if needed. IPO investments can offer potential rewards, but they also come with their set of risks and uncertainties.
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FAQs
Yes, there are. A minimum of 10% of offered shares is booked for retail investors while 25% is booked for mutual funds and insurance companies.
Yes, your bid can get rejected if you bid below the floor price.
An Offer for Sale helps the company achieve the goal of listing on the stock exchange, expanding its investor base, and enhancing the liquidity of its shares. However, the proceeds from the sale go to the selling shareholders rather than the company itself.
Before applying for an Offer for Sale, conducting thorough research on the company's financials, business model, growth prospects, competitive landscape, and risk factors is important.
OFS stands for Offer for Sale & serves the same purpose as traditional mechanism of Follow-On Public Offer (FPOs). OFS enables promoters to dilute their holdings in listed companies in a transparent manner with a wider participation through exchange based bidding platform.
At the time of bidding, an investor can invest up to Rs. 2 lakhs under retail category in one company's OFS.
Individual retail investors shall have the option to bid in the Retail Category (RI) and the general category i.e. non institutional investor (NII). However, if the cumulative bid value of such investors exceeds Rs. 2 Lakhs, the bids in the retail category shall become ineligible.
The cut off price shall be determined separately for bids received in the retail category and for bids received in the non-retail category.
Retail investors may be offered a discount on the floor price, especially in OFS of PSU companies. The discounted price is one of the key reasons to buy shares during an offer for sale and not from the secondary market. You can read the OFS prospectus for details of discount in specific OFS.
According to SEBI guidelines, a minimum of 10% of the offer is reserved for the retail category. PSUs may offer up to 20% reservation for retail investors.
