What is an Offer for Sale (OFS)?
An Offer for Sale (OFS) is a streamlined method for selling shares of listed companies through the exchange platform. Introduced by the Securities and Exchange Board of India (SEBI) in 2012, the mechanism was designed to help promoters of publicly-traded companies reduce their holdings and meet the minimum public shareholding norms.
Recent Development in OFS – Rail Vikas Nigam Ltd (RVNL)
The government’s 5.36% stake sale in Rail Vikas Nigam Ltd (RVNL) under the Offer for Sale (OFS) mechanism witnessed a strong response from institutional investors. This move aligns with the government’s strategy to divest its holdings in public sector enterprises, ensuring compliance with market regulations while promoting wider public participation in stock markets.
Purpose of OFS
- Allows promoters to dilute their stake in listed companies.
- Helps companies comply with SEBI’s minimum public shareholding rules.
- Used as a disinvestment tool by the government to offload shares in Public Sector Enterprises (PSEs).
- Facilitates wider investor participation, including retail and institutional investors.
Features of Offer for Sale (OFS)
| Feature | Details |
|---|---|
| Nature of Shares | Only existing shares are sold (no fresh issuance). |
| Eligible Sellers | Only promoters or shareholders holding more than 10% of the company’s share capital can offer shares through OFS. |
| Applicable Companies | Available to the top 200 companies by market capitalization. |
| Applicable Companies | Open to retail investors, Foreign Institutional Investors (FIIs), Qualified Institutional Buyers (QIBs), mutual funds (MFs), and insurance companies. |
| Reservation for MFs & Insurance | A minimum of 25% of the shares offered must be reserved for mutual funds and insurance companies. |
| Retail Investor Participation | At least 10% of the offer size must be reserved for retail investors. |
| Maximum Allocation to a Single Bidder | No single bidder, except MFs and insurance companies, can be allotted more than 25% of the total offer size. |
| Discount for Retail Investors | The seller can offer a discount either on the bid price or the final allotment price. |
| Mandatory Notice Period | Companies must inform stock exchanges at least two banking days before launching an OFS. |
SEBI’s Role in Offer for Sale (OFS)
SEBI, as the regulator of India’s securities market, has established specific guidelines to ensure transparency, fairness, and investor protection in OFS transactions. These include:
1. Eligibility Criteria
- Only promoters or large shareholders holding at least 10% of share capital can offer shares through OFS.
- OFS is available only for the top 200 listed companies based on market capitalization.
2. Pre-Offer Requirements
- Companies must inform stock exchanges at least two banking days before conducting an OFS.
- A company can offer discounts to retail investors either on the bid price or final allotment price.
3. Reservation for Investors
SEBI has set minimum allocation quotas to ensure wider investor participation:
| Investor Category | Minimum Allocation in OFS |
|---|---|
| Mutual Funds (MFs) & Insurance Companies | At least 25% of the total offer size |
| Retail Investors (Individuals Investing ≤ ₹2 lakh) | At least 10% of the total offer size |
| Qualified Institutional Buyers (QIBs) & FIIs | Remaining portion after retail and MF reservations |
4. Allotment Rules
- No single non-institutional bidder can be allotted more than 25% of the total OFS size, except mutual funds and insurance companies.
- Retail investors get shares at a discount (if offered by the seller).
5. Price Discovery & Bidding Process
- Floor price: The seller sets a minimum price for the shares before the offer opens.
- Investors place bids at or above the floor price, and the final allotment is based on demand.
6. Compliance & Disclosures
- The entire process is electronic and happens on the stock exchange platform.
- SEBI mandates real-time disclosures of bids during the OFS process.
Why Did SEBI Introduce OFS?
- SEBI introduced the OFS mechanism to:
- Help promoters reduce their stake in a structured manner.
- Ensure companies meet the minimum 25% public shareholding rule.
- Provide faster and more transparent share sale methods.
- Assist the government in disinvesting shares in Public Sector Enterprises (PSEs).
Recent Example: SEBI-Regulated OFS in RVNL
The Indian government recently conducted an OFS to sell a 5.36% stake in Rail Vikas Nigam Ltd (RVNL). The offer received a strong response from institutional investors, demonstrating the efficiency of SEBI’s OFS framework.
Difference Between OFS and FPO
| Aspect | Offer for Sale (OFS) | Follow-on Public Offering (FPO) |
|---|---|---|
| Nature of Shares | Only existing shares are sold | Companies can issue new shares and/or promoters can sell existing shares |
| Purpose | Used primarily for stake dilution | Used for fundraising and capital expansion |
| Who Can Sell? | Only promoters or major shareholders (10%+ stake) | Both companies and promoters can sell shares |
| Process Complexity | Simpler, faster, and conducted via stock exchange | Requires longer regulatory approval and book-building process |
| Investor Base | Open to institutional and retail investors | Open to public investors through book-building or fixed price method |
Why is the Government Using OFS for Disinvestment?
- The Indian government frequently uses OFS as a disinvestment tool to sell its stake in public sector enterprises (PSEs). This approach is beneficial because:
- Faster Execution –
- OFS transactions happen quickly compared to IPOs or FPOs.
- Market-driven Pricing –
- Share prices are determined based on demand and investor participation.
- Higher Transparency –
- Conducted via stock exchanges, ensuring fair and transparent pricing.
- Encourages Retail Participation –
- Reservations for retail investors allow broader participation in government-owned companies.
Conclusion
The Offer for Sale (OFS) mechanism is a simple, transparent, and efficient way for promoters and governments to dilute their stakes in listed companies. It ensures compliance with SEBI regulations, attracts institutional and retail investors, and plays a crucial role in government disinvestment strategies. The recent OFS of RVNL shares highlights the increasing investor interest in public sector enterprises, reinforcing OFS as a reliable mechanism for stake dilution in India’s financial markets.
SEBI’s Offer for Sale (OFS) mechanism is an effective way for promoters and governments to dilute stakes, comply with regulations, and improve market liquidity. The clear rules set by SEBI ensure that OFS remains transparent, efficient, and fair for all investors.
