What is an Offer for Sale? And How does an Offer for Sale work?

What is an Offer for Sale?

During the normal course of the business, there are often scenarios where businesses have to raise finance. In this case, they can either go for internal or external financing.

It can be seen that internal sources of raising finance are often limited and hence, are not very dependable.

Consequently, a lot of companies then opt for external sources of finance. Equity financing tends to be one of the primitive sources of external sources of finance, and many companies rely on selling shares to raise finance via equity financing.

If companies are already listed on the stock exchange, they can opt for an Offer for Sale to sell more shares to the general public.

Offer for Sale can be termed a simpler method for selling shares via the stock exchange for listed companies.

It is different from companies selling shares from scratch in that it requires existing promoters to reduce their holdings in the company.

Therefore, in Offer for Sale, promoters of the company dilute their stake in the company by selling off their shares on the exchange platform.

After they have been set up for Offer for Sale, foreign institutional investors and qualified institutional buyers can bid on these shares.

What is meant by IPO?

Initial Public Offering (IPO) is referred to the act when a company decides to get listed on the stock exchange to sell its shares to the general public. This is normally undertaken by companies that need to raise finance via equity financing.

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Initial Public Offering is the first step to selling shares to the general public.

Therefore, IPO can be defined as companies gearing up and preparing themselves to sell to the general public.

It requires certain regulations that need to be undertaken by the companies, including underwriting, and registering the company as a public limited company.

This is perhaps the most integral part that needs to be undertaken before the company decides to go public with its share trading.

How does an Offer from Sale work?

Offer from Sale is a special privilege that is not always available to all companies. To be eligible for Offer from Sale, companies need to be ranked in the top 200 companies in the share market. Eligibility criteria in this regard are based primarily on market capitalization.

In this regard, non-promoter of shareholders that possess more than 10% of the company’s share capital is also said to be eligible to offer their shares through this mechanism.

However, before the offer from the Sale is made, the company needs to inform the stock exchange and get their formalized approval before proceeding with the offering.

Therefore, this mainly works because it creates new shareholding from the existing share capital within the company in such a manner that the shareholding of the existing shareholders is not altered as a result.

Hence, this tends to be very important because it does not alter the existing shareholding dynamic within the company.

The fact that this tends to raise money without greatly adversely impacting the shareholding dynamic within the company is perhaps the biggest advantage in this regard.

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How is an Offer from Sale different from an IPO?

Offer from Sale is different from IPO on the following grounds:

  • IPO is a very initial step in equity financing within the company. It is the first instance of the company issuing shares to the general public. Offer from Sale is conducted by companies that have a considerable shareholding size.
  • IPO is carried out by companies not already listed on the stock exchange. Consequently, it requires certain documentation and processes that need to be completed by companies. On the other hand, an Offer from Sale differs from an IPO because it does not involve as many documentation-related processes.
  • Offer for Sale is a cheaper method to raise finance. On the other hand, IPO is quite expensive to carry out.
  • In IPOs, there are floor ceilings involved. As a result of this, it can be seen that investors need to pay the cut-off price based on the issuing price of the shares. On the contrary, as far as Offer from Sale is concerned, it involves a floor price.
  • Where IPO extends for a timeline of around 3-4 trading days, OFS gets over in a single day.