OFFER FOR SALE (OFS): Meaning, Cut-off Rates, Rules and Regulations

Hello traders!

Before proceeding with the topic "Understanding OFS is Important Before Investing," I just wanted to know your responses if I asked you what is the biggest issue with the 21st century?Everyone will undoubtedly have their explanations and arguments, but would you concur that too many available options cause the majority of today's issues?

Ok, there cannot be just one good thing that meets everyone's needs. Investing is a dynamic process that reflects one's desires & mindset, based on your financial goals, market strategy, and risk appetite. In order to comprehend it fully, it is essential to understand it in-depth. Make sure no stones are left untouched. When it comes to investing, it will help you make smarter decisions. We are therefore familiar with terms like IPO, FPO, and OFS, as they relate to the topic of discussion and the role of effective knowledge plays when it comes to investments.

Hence, the above statements illustrate how important it is to understand OFS before investing in it. So, let's start by defining the A, B, and C of OFS in detail.

Understanding the OFS Ecosystem: What and How?

There are various ways to sell shares, and offer for sale (OFS) is one of them.

Whenever promoters of listed companies sell shares to the general public, this is referred to as an "OFS" (Offer for Sale). Taking place on the stock exchange, OFS is a transparent process. However, it should be noted that not just any business can submit an OFS. Only the top 200 companies in market capitalization are permitted to launch a public offer for sale.

In order to meet the minimum public shareholding requirements under Securities Contracts (Regulation) Rules, promoters of registered companies (sellers) can dilute or sell their existing shareholdings by leveraging an exchange-based bidding platform. Through the OFS mechanism, non-promoter shareholders of eligible companies (top 200 companies by market capitalization) with at least a 10% stake may also offer shares.

Anybody, including corporations, insurance firms, people, mutual funds, NRIs, HUFs, and QIBS (qualified institutional bidders) can purchase shares by placing a bid or participating in the OFS process. The process does not allow sellers to bid for the shares, however. To get all the pertinent information about the upcoming OFS, go directly to the FYERS OFS platform. This can help you learn more about the OFS and save time.

Proceeding on understanding the bidding implications for investors at floor price, and then bidding at cut off. When bidders reach the floor price and above, their bids are guaranteed to be considered. It is the final price determination that determines allocation in such cases. With "cut-off" bidding, retail investors will get an allocation at various price points according to the demand.

Understanding the OFS cut-off rates:

In OFS, "CUT OFF" refers to the price at which shares are made available to non-retail categories. This rate is therefore established on OFS Day 1, open to non-retail categories.

During Day 2, retail category day, if any client chooses the cut-off rate, then the non-retail category's rate is the cut-off rate of the retail category. Investors can also exceed the cut-off price. In OFS, the allocation is determined based on the highest price priority.

Let's use an illustration to make understanding easier:

Let's say the floor price for OFS is 150 Rs.

For offering shares to a non-retail category, the lowest price of OFS is ₹150.5. 

So, the cut-off price for the retail category is ₹150.5.

Any client placing a bid in OFS at a cut-off rate will be placing a bid at ₹150.5.

But, in the retail category, some bidders choose to bid at any price higher than ₹ 150.5. Therefore, these bidders will be given preference in the allotment over other bidders who bid at the cut-off rate.

I hope this example explains and eliminates any ambiguity you may have about OFS pricing.

Planning to Apply for an OFS; Know How?

As an individual investor, you are free to submit an application in the OFS retail category. Do not exceed ₹ 2 lakhs in your bid; otherwise, you will not be eligible to apply. You require a Demat account as well as a trading account to participate in an OFS. Those who invest offline can submit their bids through designated dealers.

To avoid mistakes and lost opportunities, it is essential to understand the requirements and eligibility in the OFS.

Become familiar with the rules and regulations of the OFS:

Several rules and regulations govern the OFS process and are intended to safeguard sellers and bidders, and promote financial stability, thus it's important to have an idea about them.

• Only the top 200 companies in the share market have access to this facility. Market capitalization is the process used to determine the ranking.

• Moreover, non-promoter shareholders can offer shares through an OFS if they own more than 10% of the share capital.

• The stock exchanges must be notified at least two days in advance of the OFS.

• Among OFS shares, SEBI mandates that mutual funds and insurance companies own at least 25%

• Furthermore, retail buyers are entitled to a 10% reservation.

Frequently Asked Questions-relative to OFS:

You may still have many questions about OFS, just like we do, which is okay because it demonstrates your interest in and propensity for the subject. Several common questions about OFS that people search for are addressed in this blog section.  

• How will I find out when an OFS is coming up?

The company must notify the stock exchanges two days in advance of their OFS in accordance with SEBI regulations. Upon receiving the information for the companies listed on NSE, NSE posts the announcement or notice on its website.

• Does participation in OFS require me to enter into any contracts or commitments with trading members?

There won't be any additional paperwork or agreements if the investor is already registered with a member to participate in the OFS mechanism.

• What distinguishes it from purchasing shares on a regular market?

A system for collecting orders is the OFS platform. Here, the buyer must submit a bid. The company has set a floor price below which no bids are permitted to be submitted. At the end of the bidding process, the shares are allocated to the bidders. Unlike the regular market, investors cannot sell shares in OFS transactions and can only purchase them.

• Does the OFS have a minimum requirement to be included?

Participation in an OFS is not subject to a minimum requirement. By using the OFS mechanism, a shareholder can make a single share bid.

• Does OFS provide any discounts?

Only retail investors may receive discounts, according to SEBI's guidelines for issuers and sellers. The issuer/seller will include specifics about the discount on T-2 in their notification to the exchange. The discount may apply to either the final allotment price or the bid price.

• What specific caveats are there in an offer to purchase?

An offer for sale has two unique reservations:

1) Retail investors will receive at least 10% of the shares being offered.

2) Insurance firms and mutual funds are reserved a minimum of 25% of the shares being offered.

Final Words:

Promoters can easily and conveniently sell their shares in their organization that is publicly traded by using an OFS. Furthermore, for an investor, purchasing shares in an OFS is simple. Therefore, there is no reason to forego taking part in an OFS if the company has strong potential. But again, before participation, just research and understand OFS well to avoid any loss.

Your investment process will be easier once you understand what, why, when, how, and other factors related to OFS. Additionally, determine whether entering the mechanism now is the right choice versus waiting for a better investing opportunity. Trading and investing involve more than just words from the standard English dictionaries; they involve an entire psychological game. Thus correct and full-fledged information can help boost your confidence, and prevent emotions from influencing your decisions. OFS is a vast topic, and gaining the right knowledge can help you be a wise and calculated investor. You can go directly to School of Stocks to find more trading-related articles, where you can find relevant content for both novice and experienced traders.

Happy trading!

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