What is Offer For Sale (OFS)?

The OFS full form is offer for sale. Under this method, the promoter of a company sells their portion of the shares to the public through a stock exchange. This allows promoters to dilute their shareholdings through a robust and transparent process. OFS is governed and looked after by the Securities and Exchange Board of India (SEBI). It also aids the companies in fulfilling the minimum public shareholding as stated by the SEBI that facilitates the involvement of the public. In the eyes of the investor, the Offer for Sale (OFS) can provide an option to purchase stock at a discounted price, but it can also result into short-term volatility in the market because of the increase in the supply of stocks. This article explains what is offer for sale, how it works, its key features, and more.  

Offer For Sale Example 

Let’s assume that a company has 100 shares. The promoters hold 70 shares (70%), and the public holds 30 shares (30%). As per the regulations laid down by the Securities and Exchange Board of India, the promoters are required to cut down their shareholding. The promoters decide to sell 10 shares through OFS. The promoters are left with 60 shares (60%), and the public's shareholding rises to 40 shares (40%). 

After understanding the offer for sale meaning with example, the article further discusses how OFS works. 

How Does an Offer for Sale Work? 

Here’s a step-by-step guide on how offer for sale works:  

Announcement by the Company 

The first step involves the promoters or major shareholders wanting to sell a certain number of shares. The company announces the details of the OFS to the stock exchanges, such as the National Stock Exchange of India and the Bombay Stock Exchange. 

Disclosure of Floor Price 

A minimum price, called the floor price, is disclosed. No one is allowed to bid below this price. This is done to ensure that there is transparency and that the price is maintained. 

Bidding by Investors 

On the day of the OFS, the investors bid for the shares through their brokers. Both retail and institutional investors can bid for the shares. The retail investors are sometimes offered a slight discount on the floor price. 

Allocation of Shares 

After the bidding period is over, the shares are allocated based on the demand and the price bid. If there is more demand than supply, the shares are allocated proportionately. 

Settlement and Credit of Shares 

After the allocation of shares is completed, the shares are credited to the Demat accounts of the investors. The debit is made, and the transaction is settled through the exchange mechanism. 

Key Features of an Offer for Sale 

The following are the key features of an offer for sale:  

• Applicability: An Offer of Sale (OFS) is used by the promoters and the large shareholders to sell the existing shares to the public. New shares are not issued by the company.  
• Relevant to Listed Companies: OFS is usually open to those companies that have already been listed in the stock markets.  
• No Dilution of Share Capital: Existing shares are sold, and therefore there is no dilution of ownership or a number of shares.  
• Made with Stock Exchanges: The whole process is carried out through the stock exchange platform and therefore, it is transparent. 
• Floor Price Announcement: The seller announces a minimum price (floor price), below which bids are not accepted. 
• Short Subscription Window: OFS is usually open for bidding for a limited period, often just one or two trading days. 
• Open to Retail and Institutional Investors: Both retail investors and institutional investors can participate, often with a reserved portion for retail investors. 

After understanding  what is OFS in IPO, the article further explains how to participate in an OFS. 

How to Participate in an OFS? 

To participate in an OFS, investors need to follow these steps: 

• Check the OFS Announcement: Investors need to first review the details announced on stock exchanges like the National Stock Exchange of India or the Bombay Stock Exchange. This review includes everything from dates, floor price, to the number of shares offered. 
• Ensure Having a Demat and Trading Account: Participation requires an active Demat and trading account with a registered broker. 
• Place a Bid Through Broker: When the OFS window is open, investors need to submit their bid by specifying the quantity of shares and bid price (above or equal to the floor price). 
• Select Investor Category: It is important to select the investors category. The retail investors need to bid within the specified investment limit to qualify under the retail category. 
• Wait for Allocation: Once the bidding process is closed, the shares are allotted based on demand and applicable rules. 
• Settlement of Funds and Shares: Once the shares are allotted, the funds will get debited and the shares will be credited to their respective Demat account. 

What Are the Rules and Regulations in an Offer for Sale? 

The following are the rules and regulations in an offer for sale.  

Eligibility of Sellers 

Only promoters or major shareholders of listed companies are allowed to offer shares through OFS. 

Stock Exchange Platform 

OFS must be conducted through a recognised stock exchanges such as the National Stock Exchange of India and the Bombay Stock Exchange. 

Price Disclosure 

The seller must declare a base price before the issue opens. Investors cannot place bids below this price. 

Reservation for Retail Investors 

A certain percentage of shares is reserved for retail investors to ensure wider participation. 

Short Duration 

The OFS generally remains open for one to two trading days. This makes it a time-bound process.  

Things You Need to Consider Before Investing in 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, investors need to evaluate the company’s financial performance, business model, growth prospects, and management. Investors can also  compare these facets of the company with that of its peers. Additionally, it is also crucial that they apply for the OFS only if they 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 their duty as an investor to conduct research before investing in the OFS. 

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 its shares through the OFS to see if it's worth investing in it or not.  As you know. The same holds even if it is an IPO. Open a demat and trading account with blinkX to invest in upcoming OFS and IPOs. Investors can download the BlinkX trading app to make their initial trade in the stock market.