What Is OFS in the Share Market? A Beginner’s Guide to Offer for Sale (OFS)

Understanding OFS

What is OFS in the Share Market? OFS, or Offer for Sale, is a mechanism by which promoters or key stakeholders of a company can sell their shares directly on the stock exchanges. The Securities and Exchange Board of India (SEBI) introduced this method in 2012 to facilitate the dilution of holdings by promoters in listed companies and to provide an additional avenue for public and institutional participation in stock markets.

In an OFS process, the company does not issue new shares; instead. The promoters sell their existing holdings. This method is popular among large-cap companies. Primarily because it allows significant selling of shares in a streamlined and transparent manner.

Key Features of OFS

1. Transparency: The entire process is conducted via the stock exchange platform, ensuring transparency and minimal risk of manipulation.
2. Speed: OFS is generally completed within a single trading day. Making it a swift way for the promoters to offload shares.
3. Fair Pricing: The price discovery mechanism in OFS is efficient. Buyers can place their bids within the specified price range, ensuring that the shares are sold at market-determined prices.
4. Minimum 25% Reservation for Retail Investors: SEBI mandates that a minimum of 25% of the shares offered in an OFS must be reserved for retail investors (those subscribing to shares worth INR 2,00,000 or less).

How Does an OFS Work?

Step-by-Step Process

1. Announcement: The company or promoters announce their intention to sell shares via an OFS. This announcement includes details like the minimum price, date of the offer, and the quantity of shares.
2. Price Band and Floor Price: A floor price is set, which is the minimum price at which bids can be placed. However, investors can place their bids at or above this floor price. 
3. Bidding Window: The OFS window is typically open for one trading day. During this period, investors can place their bids.
4. Allocation: After the bidding period ends, the shares are allotted to the highest bids following the price priority method.
5. Settlement: Once the shares are allocated, the settlement process is conducted, involving transferring funds to the sellers and shares to the buyers.

Example Calculation

Let’s assume a company named XYZ Ltd. decides to conduct an OFS to sell 10 lakh shares at a floor price of INR 100 per share.

1. Announcement:

XYZ Ltd. announces the OFS with a floor price of INR 100 per share and 10 lakh shares available.

2. Bidding:

– Retail Investor 1 places a bid for 2000 shares at INR 102 per share.

– Retail Investor 2 places a bid for 5000 shares at INR 101 per share.

– Institutional Investor places a bid for 3 lakh shares at INR 100 per share.

3. Price Discovery:

Based on bids, let’s assume the cutoff price is determined to be INR 101 per share.

4. Allocation:

– Retail Investor 1 gets 2000 shares at INR 101 per share.

– Retail Investor 2 gets 5000 shares at INR 101 per share.

– The remaining shares are allotted to institutional investors or other bidders at INR 101 per share.

5. Settlement:

Both retail investors and the institutional investors transfer the funds. Shares are credited into their trading accounts.

Importance of a Trading Account

Investors need a trading account to participate in any stock market activities, including OFS. A trading account connects to your bank account and demat account, allowing seamless financial transactions and share transfers.

How to Set Up a Trading Account

1. Choose a Brokerage Firm: Select a brokerage firm based on services, fees, and customer support.
2. Account Opening Form: Fill out the account opening form, providing personal details, income proof, and bank details.
3. Documentation: Submit essential documents like PAN card, address proof, identity proof, and a passport-sized photograph.
4. Verification: The brokerage firm verifies the submitted details.
5. Activation: Once verified, your trading account gets activated. Enabling you to trade in the stock market, including participating in OFS.

Advantages and Disadvantages of OFS

Advantages

1. Transparency: Conducted via the stock exchange, ensuring fairness and transparency.
2. Quick Execution: The process usually completes within a day.
3. Fair Pricing: Market-driven price discovery benefits both buyers and sellers.

Disadvantages

1. Price Fluctuation: The market-driven price discovery may sometimes not align with the expectations of investors, leading to price fluctuations.
2. Limited Participation: Not all investors might have the readiness or the capital to participate in OFS, especially in large quantities.

Conclusion

Promoters and major stakeholders often use an Offer for Sale (OFS) as a popular method to sell shares in the secondary market. Understanding the nitty-gritty of OFS. Including the process and its advantages and disadvantages, is essential for investors. Equipping yourself with knowledge and an active trading account will allow you to navigate the intricacies of participating in an OFS, ensuring informed decision-making.

Remember, while investing in the stock market. It is crucial to understand all aspects and implications thoroughly.

Disclaimer

Investing in the Indian stock market involves risks. It is essential for investors to gauge all the pros and cons before making any financial commitments. This article provides information for educational purposes only and does not constitute financial advice. Consult with financial experts and conduct your research to make informed investment decisions.

By familiarizing yourself with OFS and the procedures involved, you can make better-informed decisions, thereby improving your chances of success in the dynamic world of stock markets.