The year 2021 and 2022 have brought a season of IPOs which has given a breath of fresh air to the stock markets. Investors get a good opportunity to be part of companies that have sound growth potential backed by strong financials. Most IPOs included an Offer for sale however, the objectives of the two are starkly different along with the beneficiaries. The details of the offer for sale and its differences from an IPO are mentioned hereunder.
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What is an Offer for Sale?
An Offer for sale is an IPO where the promoters sell their existing stake in a company with the intention of inviting the participation of retail shareholders. Back in 2012, as per the regulations of SEBI and Companies Act 2013, only promoters and promoter groups were permitted to sell their stake to achieve the required minimum threshold of retail participation of 25% in the shareholding of any company.
This rule was modified to allow even non-promoter shareholders of the eligible companies to offload their holdings provided they are of a minimum of 10% of the total share capital. In such cases, the proceeds from the IPO will be received only by the promoters and not by the company.
What are the applicable rules regarding an OFS?
A company choosing to launch an IPO based on the offer for sale has to abide by a few conditions laid down by SEBI in this regard. Some of the prime necessities to be met by the company and the participants of the OFS are highlighted below.
- The option of OFS is available only to the top 200 companies in the equity market. These rankings of the companies are based on the market capitalization of such companies.
- The company needs to inform the stock exchanges of its Offer for Sale at least 2 days before such an offer.
- In the IPO with an OFS, the company has to reserve at least 25% of the IPO for mutual funds and insurance companies.
- The retail investors get a reservation of a minimum of 10% but they can invest through the general category too.
- Investors have to bid above the floor price set by the company in the OFS. If any bids are at a price lower than the floor price, the bid will be automatically rejected.
What are the advantages of an OFS?
Among the series of IPOs this year, many of them were part OFS and part fresh issue while some were solely an Offer for sale. The multiple advantages of an OFS for the company and the investors are mentioned hereunder.
- Ease of investing
Investors can participate in the OFS through the bidding process which is entirely online, therefore, being faster and involving less paperwork. With the new technologies, it is further simpler for investors to participate through the online portal provided by their brokers.
- Discount for retail investors
Retail investors usually get a discount of up to 5% in the OFS. This adds to their returns in the long term.
- No additional or hidden charges
Bidding in the OFS is a cost-effective way to participate in the IPO as there are no additional charges. Investors only have to pay the Securities Transaction Tax (STT) which is levied on all equity transactions.
What are the disadvantages of an OFS?
While there are many advantages of investing in OFS, there are a few shortcomings too. These shortcomings are mentioned below.
- Limited window to participate in OFS
The window to participate in the OFS in the IPO is usually limited to 1 trading day unlike in FPO where investors get at least 3 days to place their bids. This provides limited opportunity for the investors to participate in the OFS and gain an advantage of the same.
- Lower reservation for retail investors
As per SEBI guidelines, the minimum reservation for retail investors in an OFS is 10% unlike the 35% in a fresh issue IPO. This further limits the investment opportunity for retail investors in the OFS.
What are the differences between an OFS and an IPO?
Some of the basic differences between an IPO and an OFS are tabled below.
|Purpose||An OFS (Offer for Sale) is a mode for promoters and eligible shareholders to dilute their holdings in the company.||IPO is a mode to attract public investment into the company for specific purposes like growth and expansion of the company, investing in a new venture, the redemption of debentures, etc.|
|Reservation for retail investors||OFS has a reservation of a minimum of 10% for retail investors.||IPO has a reservation of 35% for retail investors as power the guidelines of SEBI|
|Regulations||A company does not need to seek the approval of SEBI for an Offer for Sale but needs to inform the stock exchanges 2 days prior to the OFS.||There are stricter guidelines levied by SEBI that need to be followed by a company in case of an IPO. They need to submit a DRHP after which an RHP needs to be submitted if the former is accepted by the regulator. Following this, the company can launch an IPO|
|Cost||The cost involved in the case of an OFS is minimal as compared to an IPO||The company needs to bear all the expenses in an IPO like the underwriter’s fees, advertising fees, meeting the regulations of SEBI|
|Impact on share capital||There is no impact on the share capital of the company as in an OFS, there is a mere transfer of shares from the promoter shareholders to other shareholders||In an IPO, there is an increase in the share capital to the extent of the fresh issue.|
|Treatment of the proceeds||The proceeds for the OFS are received by the promoters and other eligible shareholders who are offloading their holdings in the company.||In an IPO, the proceeds from the same are utilized as per the objectives of the IPO.|
An offer for sale is an easy way for the promoters to dilute their holdings in the company and increase public or retail participation along the way. The rules of investing for retail investors remain the same as they need to focus on the core financials and fundamentals of the company to ascertain if it is a good investment option from a short-term or long-term investment perspective.
No, the offer for sale is quite different from an IPO. The former is the dilution of stake by promoters while the latter is inviting public subscription to the capital for the first time.
Investors need to have a Demat account and a trading account to bid in the OFS on the available dates for the same. Bidding for shares cannot be lower than the floor price.
Some of the reasons for an OFS can be increasing retail investments to meet the guidelines of SEBI, booking profits while exiting the company, need for funds to finance new ventures, promoters wishing to exit the company based on any insider information, etc.
No. Bidding in the OFS cannot be at a price lower than the floor price.