What is an offer for sale
The offer for sale is when the promoters of the company present their shares to be sold on the stock exchange. Although, the control of the existing shareholders is diluted when they sell the shares.
However, it helps them to get access to funds that can be used for various reasons. These shares can be purchased by anyone, including financial institutions and retails investors, etc.
How does the bid work on the offer for sale?
The process starts when the company sets the floor price/base price for the price. The bid has to be made by potential buyers for at least floor price or higher. After the bids are placed for the purchase of the shares, the shares are allocated based on the bidding.
There is no minimum threshold required for the number of shares to be purchased. Even the bid can be made for the purchase of a single share. The process of allocation is based on the transparent process of bidding.
However, to get an allocation of the shares by OFS, the investors need to bid at a price that is higher than the floor price. If you place the bid at a price lower than the bid price, it will not be accepted.
In addition to this, there are two methods for setting the price of the shares that include the single clearing price and the multiple clearing prices. The single clearing price is when a single price is set for the allocation of all the shares under OFS.
On the other hand, multiple clearing prices are when allocation is made based on bidding. A higher quantity of the shares is allocated to the higher bid to get maximum consideration for the sale of the shares.
OFS VS IPO
Offer for sale, and initial public offers are both methods of selling the share and getting access to the finance. However, there is little difference in both of these methods. In an offer to sell, the promoters of the company offer their shares for sale.
On the other hand, IPO is the process in which a newly listed company offers its shares to potential shareholders. The purpose of the IPO is to get access to the funds for financing and other needs of the company.
However, the process of the IPO is complex and involves several regulatory compliances. On the contrary, the OFS is straight forwards, and the process can be completed even in one trading only.
FPO VS OFS
FPO is when the company issues further shares after the IPO. The FPO results in the capital infusion in the equity structure of the company.
On the other hand, in OFS, the promoters of the company issue existing shares. It does not result in direct capital infusion like FPO.
Further, the issuance of the FPO does not affect the proportion of the equity and debt of the financing structure.
Important consideration
Due care needs to be exercised in deciding on the investment via OFS because new funds do not enter the company.
In other words, direct capital infusion does not take place. The promoters might perceive their stock to be overvalued and selling the stock by OFS before it returns to its real value. So, the investors need to exercise due care in the process of the OFS.
Advantages of an offer for sale
Discounts on the share price
The promoters may offer a discount on the sale of the share to the retail investors. Even the discount can be offered on the floor price set by the promoters.
This discount usually falls in the range of 5%. That’s a great attraction for retail investors to bid for the shares of the company.
The successful process of the offer for sale helps to raise the finance for the company and allocates the shares for the new shareholders.
Less requirement of the paperwork
The process of OFS is comparatively straightforward and does not require maintenance of the complex paper works. All the process is bidding is computerized and does not involve maintenance of the complex paperwork.
Cost efficiency
The buying process of the securities under offer for sale does not require any additional charges to be paid on the transaction.
It just requires incurring an average cost for the purchase of the securities. So, the purchase of the security is cost-effective.
Overall, the easiness of the procedural formalities and discounts on the purchases make the offer for sale one of the attractive processes to get an allocation of the shares.
Disadvantages of an offer for sales
Limited reservation for retail investors
Minimum 10% of the offer is required to be allocated for the retail investors. It’s even lower than PUS and IPO.
In PSU, the threshold to be maintained for retail investors is 20%. On the other hand, the threshold for the IPO is 35%.
So, the required threshold is the lowest in the case of an offer for sale.
Limited time for investment
The issue period of the offer for sale does not last for more than a single day. It’s a comparatively lower time than FPO.
However, the stock exchange issuing OFS must inform the stock exchange two days before making a listing for the OFS. Hence, it’s essential to keep regular updates to avail OFS.
How to participate in the OFS
It’s essential to remain updated about OFS in the market. If the windows are open for the OFS, anyone, including retail investors / individual investors, can participate in the OFS. The bid can be made by the dealer or online portal of the exchange.
To be conclusive, an offer for sale is when promoters of the company list their shares to sell on the exchange. They set a floor price, and the bidding is made above the floor price.
The OFS must not be confused with the IPO and FPO. An IPO is when the company offers the shares for the first time after listing, and FPO is when the further shares are issued after the first issuance.
Both IPO and FPO have effects on the financing structure of the company. On the other hand, OFS does not directly impact the financing structure of the company.