What is OFS?
In India, the stock market is believed to provide adequate opportunities to investors and traders trading online. However, even private businesses can step in and make use of all the options open to them. Among these methods of raising capital in the stock market, you may have heard of Initial Public Offer (IPO) or Follow-on Public Offer (FPO). However, OFS, meaning an Offer for Sale, is yet another means through which businesses can raise capital for their company’s operational needs.
In the stock market, private companies can opt to raise additional funds through an IPO, where the shares are sold publicly or to investors outside the company. The capital that the company gains through this process is used to grow or expand the business.
However, at times, even the capital from an Initial Public Offer may not suffice to meet these goals; this is when the company may choose to have an Offer for Sale (OFS). It is also to be noted that an OFS is open only to the top 200 companies based on market capitalisation. And with this, let’s find out more about what an OFS is.
OFS Meaning: What is an Offer for Sale?
In the case of an OFS, a company’s promoters or the key shareholders of the firm dilute their stake and sell their shares on the exchange. Once these shares are for sale, they are open to other companies, retail investors, Qualified Institutional Buyers (QIBs) and Foreign Institutional Investors (FIIs) for bidding.
If you are trading online, it is essential to have a demat (dematerialisation) account and a trading account with a reliable stockbroker. When it comes to understanding the Offer for Sale meaning in the stock market, it is a cost-effective way to invest in equity.
Unlike an IPO, where you have to apply for shares in lots, an Offer for Sale lets you apply for a single share if you want to do so, as there is no minimum limit for participating in an OFS. It is necessary for the investor/buyer to place a bid before they can obtain the shares.
Also Read: F&O Stock List with Lot Size
The company that is selling the shares fixes a floor price, below which no bids can be placed. After all the bids have been placed, the shares are allotted to various buyers.
More about OFS and its meaning
An OFS can be a sensible investment if the investor is aware of the company’s reputation and its future growth potential. Since an FPO does not involve creating fresh shares and only dilutes a promoter’s stake in a company, the OFS can be carried out in a single session when trading online, unlike an IPO or FPO, which are long processes. The lack of excessive paperwork is another reason why an OFS consumes less time.
When it comes to the cost-effectiveness of an OFS, trading in these shares is considered to be quite economical for investors. Retail investors can get a discount of about 5% on the floor price when they purchase the shares while trading online.
Moreover, there are no additional charges incurred when an investor places their bid. Only the Securities Transaction Charges (STT) and the regular transaction charges are applied to the OFS bid as these taxes are applicable for all equity investments.
It can be said that investing in an OFS has its own set of advantages since the hassle of documentation is absent from the process. One only needs to specify the price and quantity of the OFS issue when trading online.
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Frequently Asked Questions
A company that plans to opt for an OFS must inform the stock exchanges about their plans and process at least two days prior to the issue.
Yes, as per SEBI’s directives, companies must offer at least 10% reservation of an OFS to retail investors. As for PSUs, the reservation may go up to 20%. Another 25% has to be compulsorily reserved for insurance firms and mutual fund companies. Also, the total bid amount an investor can place, whether through multiple bids or otherwise, should not exceed ₹2 lakhs, failing which the bid becomes disqualified.
OFS shares are allocated through a single clearing price and multiple clearing prices. In the former, the investors receive the shares at the same price, while in the latter, the shares are allotted based on price priority.
The process of OFS is quite a new concept as compared to IPOs and FPOs, and was introduced by the Securities and Exchange Board of India quite recently, only in February 2012.
No, an OFS is not the same as an IPO or an FPO as, in an OFS, a promoter’s stake in the company is diluted, and the shares are sold without any new shares being created.