Offer for Sale (OFS): Features and Working

Demystifying The Concept Of Offer For Sale (OFS): Features And Working

Offer For Sale (OFS), represented in Indian financial markets, is a way for promoters or large shareholders to reduce their shareholding in existing companies. This tool provides an effective and transparent mechanism for retail and institutional investors to take part in the economic growth story of well-performing firms. Similarly, it also gives promoters a channel to comply with regulatory norms with regard to minimum public shareholding. For individuals and companies looking to embrace OFS, opening a Demat account is the first step.

A Demat account is a prerequisite for participation in OFS. It’s a digital account that enables investors to buy, sell and hold shares and securities in electronic form. This is akin to a bank account, only that instead of money, a Demat account holds shares, bonds, mutual funds, etc. A Demat account opening is an easy and straightforward process involving Know Your Client (KYC) documentation, such as identity proof, address proof, and passport-sized photographs. An individual may open a Demat account with a Depository Participant (DP) regulated by Central Depository Services India Ltd or National Securities Depository Limited.

The OFS Investor will use the Demat account to hold and manage the purchased shares. Once the Demat account is functional, investors place their bids for the shares in the OFS. These bids have to be placed above or at the floor price set by the selling shareholder. For instance, if the floor price is INR100, investors can bid for the shares at INR100 or above. After the OFS process is over, the shares are allocated to the highest bidder until the shares in the OFS are exhausted. These bought shares will be credited to the Demat account.

Understandably, the manner in which the OFS is carried out is crucial in providing opportunities to various types of investors. Institutional Investors can bid on day one of the OFS, while Retail Investors (individuals investing up to INR 200,000) can place their bids on both day one and two. Such accurate classification enables better participation and ensures fair play in the otherwise complex securities market. Bidders are presented with a single bid/no bid option that simplifies the entire process.

Certain features distinguish the Offer for Sale mechanism from other equity dilution methods. Unlike an Initial Public Offering (IPO), OFS is conducted on the exchange platform rather than the issuer company’s platform. This simplifies the process and makes it time efficient. Furthermore, in an OFS, the shares are provided for sale immediately after the bid is closed and settled on the trade for trade basis.

Most importantly, OFS has inherent advantages that facilitate the ease of overall transaction processing. It reduces time and cost due to no fresh issue of securities. It also centralizes the process, making it easier for companies to reduce their shareholding and for individual and institutional investors to participate.

However, the actual benefits that OFS can bring to an investor and ultimately the success of a transaction will depend on the health of the company’s stock and the mood of the securities market. Therefore, it is important for investors to be diligent and analyze the financial stability of a company and the possible returns they can get from investing in the stock.

As such, trading in the Indian stock market carries potential risks and rewards. An informed decision should be made after considering the company’s performance, share price, and market conditions.

Disclaimer: This article is intended for informational purposes only and should not be considered as an investment recommendation. Investors are urged to consider all the pros and cons and make informed decisions while trading in the Indian stock market.