If you are a stock market investor, or are on the verge of becoming one, you must have stumbled on the term IPO. You must have, surely, given the recent hype around IPOs in traditional business news media as well as social media. In this article, we will cover a term very closely related to IPOs, called the OFS, which stands for “Offer for Sale”. Let’s explore what an offer for sale is and how it is related to an IPO and also in which ways they are different. Finally, we will discuss the idea of investing in an offer for sale.
What is an Offer For Sale?
In the universe of online share trading, an Offer for Sale (OFS) is a method through which existing promoters and other significant shareholders offer their shares for sale to the general public. The OFS functions as an avenue for these entities to reduce their shareholding or divest their stakes in the company. In an OFS, the shares are sold through a stock exchange, like the NSE or BSE allowing retail investors to participate in the sale.
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How is it Different from an IPO?
Now that you know the meaning of an Offer for Sale let’s see how it differs from an IPO. If you know what an IPO is, an IPO (Initial Public Offering) is the process through which a company offers its shares to the public for the first time. The objective of an IPO is to raise fresh equity for the business to undertake capital expansion projects and growth ventures. In simple words, the funds raised by an IPO are used to grow the business.
On the other hand, an OFS is the sale of the existing shares by the promoters or shareholders of a company to the public, meaning the money raised through an OFS goes to the promoter or shareholder selling their stake. Moreover, an OFS can be conducted by companies that are already listed on the stock exchange, as well as private companies coming out with their IPOs.
How the latter essentially works is the company launching its IPO comes out with a scheme wherein they launch an OFS in tandem with the IPO. So, some of the proceeds — the fresh equity raised — goes into the business, while the rest of the proceeds — the OFS — go to the exiting shareholders.
How to Participate in an OFS?
Investing in an OFS is relatively straightforward: To participate in an OFS, you need to have a demat account and a trading account. At the same time, there also needs to be a live OFS — a pure one or a hybrid offered in tandem with an IPO. So keep up with the news to monitor an upcoming OFS or IPO.
If you see a good deal in an OFS, place a bid with reference to the provided price band using your trading account through the IPO section of your trading app or platform. Your bid should specify the quantity of shares you wish to purchase and the price at which you are willing to buy. If your payment is successful and you are allotted shares in OFS, they will be credited to your demat account.
What Must You Do Before Applying for an OFS?
Before investing in an OFS, it is mandatory to research the company selling its shares and assess the price at which it is selling its shares. So, you evaluate the company’s financial performance, business model, growth prospects, and management. You also could compare these facets of the company with that of its peers. Additionally, it is also crucial that you apply for the OFS only if you believe that the company is selling its shares at a fair price.
A prevalent misconception about OFS is that the promoters are selling the shares because they don’t see a bright future for the company, they are desperate to sell their stake and make money before things turn gloomy. Well, that’s not necessarily true since mostly the existing promoters and venture capitalists invested in the company simply want to book profits.
Moreover, promoters rarely sell all their stake; venture capitalists do, but that’s their job — so that does not imply the company is bad. It’s your duty as an investor to conduct research before investing in the OFS.
In conclusion, an OFS provides retail investors with an opportunity to invest in shares of companies and potentially benefit from their growth. It is your duty as an investor to conduct research on the company selling their shares through the OFS to see if it's worth investing in it or not. As you know. The same holds true even if it is an IPO. Open a demat and trading account with blinkX to invest in upcoming OFS and IPOs. You can download the blinkX trading app for making your initial trade in the stock market.
Offer for Sale FAQs
Generally, retail investors, high-net individuals, and institutions can all participate and buy shares in an OFS.
The company conducting the OFS may set a maximum bid limit for retail investors to ensure wider participation from different investor classes. This limit can vary from one OFS to another.
Neither is better or worse than the other. As an investor, you must scrutinise and assess the quality of the company offering shares, in terms of performance and compliance, and not the medium (IPO or OFS) through which they offer the shares.
Mostly shares purchased in an OFS, at least by retail investors, are not subject to any lock-in period.
It depends on the number of applicants and the number of shares sold through the OFS. If the number of applicants exceeds the number of shares sold and you are not allotted any shares, then you will receive a refund.